Question
Grainwaves Ltd is an Australian firm which is publicly-listed on the ASX. The company has a long term target capital structure of 55% Ordinary Equity,
Grainwaves Ltd is an Australian firm which is publicly-listed on the ASX. The company has a long term target capital structure of 55% Ordinary Equity, 5% Preference Shares, and 40% Debt.All of the shareholders of Grainwaves are Australian residents for tax purposes.To fund a major expansion Grainwaves Ltd needs to raise a $150 million in capital from debt and equity markets.
Grainwaves Ltd's broker advises that they can sell new 10 year corporate bonds to investors for $105 with an annual coupon of 6% and a face value of $100. Issue costs on this new debt is expected to be 1% of face value. The firm can also issue new $100 preference shares which will pay a dividend of $7.50 and have issue costs of 2%.The company also plans to issue new Ordinary Shares at an issue cost of 2.5%.The ordinary shares of Grainwaves are currently trading at $4.50 per share and will pay a dividend of $0.15 this year.Ordinary dividends in Grainwaves are predicted to grow at a constant rate of 7% pa.
- Calculate how much debt Grainwaves will need to issue to maintain their target capital structure.(2 marks)
- What will be the appropriate cost of debt for Grainwaves.(8 marks)
- Calculate how much Preference Share equity Grainwaves will need to issue to maintain their target capital structure.(2 marks)
- What will be the appropriate cost of Preference shares for Grainwaves?(8 marks)
- Calculate how much Ordinary Share equity Grainwaves will need to issue to maintain their target capital structure.(2 marks)
- What will be the appropriate cost of Ordinary Equity shares for Grainwaves?(8 marks)
- Calculate how the Weighted Average Cost of Capital for Grainwaves Ltd following the new capital raising.(10 marks)
- Grainwaves Ltd has a current EBIT of $1.3 million per annum. The CFO approaches the Board and advises them that they have devised a strategy which will lower the company's cost of capital by 0.5%. How will this change the value of the company? Support your answer using theory and calculations.(10 marks) expain in details
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