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The Nelson Cotton Company Ltd is looking to determine its cost of capital and has asked you to assist. Information available include the following: Preference Shares: The preference shares were issued for $6 with a 10% dividend. The current market price is $9. When they were initially issued, they issued $36m worth of shares. Debt: The market value of Debt that matures in 15 years is $75m, trades at par and pays a 4% coupon per period (8% per year). The market value of Debt that matures in 30 years is $25m, trades at par and has an EAR of 7%. Ordinary Shares: The company also has 50 million ordinary shares on issue with a market price of $4 each. The Beta of these shares is 1.25, the market risk premium is 4% a and the risk free rate is 5%. These shares last paid a dividend of 20 cents with expected growth of 3%. Other Information: Corman's tax rate is 30% Calculate the following: a) Determine the EAR for the debt that matures in 15 years. (2 Marks) EAR = (1.04)2-1 = 1.0816 - 1 = 0.0816 or 8.16% b) Determine the return on debt that needs to be used in your WACC calculation. Calculate this on an after-tax basis. (3 Marks) ka = (0.75 X 8.16%) + (0.25 x 7%) = 6.12% +1.25% = 7.87% After-tax ka = 7.87 x (1 -0.3) = 5.51% c) Determine the required return on the of preference equity (2 marks) 0.6 6.67% d) Determine the required return of the ordinary equity using the CAPM (2 marks) res = 5% +1.25(4%)=10%