Given the following information on Ke-Ma-Gen Ltd., what is its WACC? Retain as many decimal places as possible in your intermediate answers, and round your final answer (in percentage) to two decimal places.

Debt:

Number of bonds = 6000

Par value = $1000

Coupon rate = 8% (semi-annual coupons)

Time to maturity = 10 years

Market value = 97.5% of par

Common Equity:

Number of shares outstanding = 1,000,000

Par value = $1

Price per share = $5.00

Dividends per share = $0.70

Preferred Equity:

Number of shares outstanding = 50,000

Price per share = $20

Dividend yield = 5%

Other information:

Tax rate = 35%

Equity beta = 2

Market risk premium = 11%

Risk-free rate = 5%

ABC Co. has the following dividend payment history for the last five years, with the most recent dividend being $1.10: $0.50, $0.60, $0.80, $1.00, $1.10.

Historical growth rate estimation

a.What is the compound growth rate of dividends based on the last five years of dividends data?

b.Calculate the year-to-year growth rates in dividends.

c.What is the average year-to-year dividend growth rate?

d.ABC has a retention ratio of 0.9 and a historical return on equity (ROE) of 0.25. Using these two additional pieces of information, calculate an alternative estimate of dividend growth rate, g.

e.Calculate the expected growth rate of dividends by averaging the growth rates in parts (a), (c), and (d).

Dividend growth model

f.ABC's share price is currently $70, and the most recent dividend paid is $1.10 per share. Using the expected growth rate estimated in (e) above, calculate the cost of equity using the dividend growth model.

SML model

g.Given that the firm's equity beta is 2, the risk-free rate is 5%, and the expected return on the market index is 13.5%, calculate its cost of equity using the SML model.

WACC calculation

h.Calculate the firm's average cost of equity by averaging the answers in parts (f) and (g).

i.ABC's capital structure contains only debt and equity. Given that its debt-equity ratio is 1, its cost of debt is 10%, and its marginal tax rate is 35%, calculate the firm's WACC using the cost of equity calculated in part (h).

NPV calculation

j.The firm has a project with an initial cost of $1 million and annual cash savings of $300,000 for the next seven years. The risk adjustment for this project on the WACC is +5%. Calculate the net present value of this project using the WACC calculated in (i) above.

k. Should the firm go ahead with the project?

We find the following information on NPNG (No-Pain-No-Gain) Inc.:

EBIT = $2,000,000

Depreciation = $250,000

Change in net working capital = $100,000

Net capital spending = $300,000

These numbers are projected to increase at the following supernormal rates for the next three years, and 5% after the third year for the foreseeable future:

EBIT: 20%

Depreciation: 10%

Change in net working capital: 15%

Net capital spending: 10%

The firm's tax rate is 35%, and it has 1,000,000 outstanding shares and $8,000,000 in debt. We have estimated the WACC to be 15%.

a.Calculate the EBIT, Depreciation, Changes in NWC, and net capital spending for the next four years.

b.Calculate the CFA* for each of the next four years, using the formula

CFA* = EBIT(1 - T) + Depr - NWC - NCS.

c. Calculate the firm's share price at time 0.