Question
): Mr. Xero has just been hired to compute the cost of capital of debt, bonds, preference shares and ordinary shares for Mold-Flam Corporation (MFC)
): Mr. Xero has just been hired to compute the cost of capital of debt, bonds, preference shares and ordinary shares for Mold-Flam Corporation (MFC) Ltd.
- Because MFCs short term and long-term debts do not trade very frequently, Mr. Xero has decided to use 10% as cost of debt, which is the yield to maturity on a portfolio of bonds with a similar credit rating and maturity as MFCs outstanding debt. In addition, MFC faces a corporate tax rate of 30%.
- MFCs bonds are frequently traded. A MFC bond has a $1000 face value and a coupon interest rate of 10% that is paid semi-annually. The bonds are currently selling for $1025 and will mature in 4 years.
- MFCs preference shares pay an 8% dividend on a $155 face value. The market price at which the preference shares could be sold is only $85. MFCs corporation tax rate is 30%.
- MFCs ordinary shares paid a $2.25 dividend last year. Firms dividends are growing at a rate of 7% per year and this growth rate is expected to continue into the foreseeable future. The price of these shares is currently $30.
- The risk-free rate is 6.5% per annum and the average expected rate of return in the market is 15.5% per annum, also MFCs ordinary shares have a beta of 0.75.
Under the assumption that the firms present capital structure reflects the appropriate mix of capital sources for the firm, it is determined the market value of the firms capital structure as follows:
| Source of Capital | Market Values |
| Debt | $1755000 |
| Bonds | $4500000 |
| Preference Shares | $2500000 |
| Ordinary Shares | $6500000 |
| Retained Earnings | $1500000 |
Required: Use the formula sheet at the end of the document
- What is MFC after-tax cost of debt? (3 marks)
[Answer and show workings here]
- What is the cost of MFCs Bonds? (3 marks)
[Answer and show workings here]
- What is MFCs cost of preference shares? (3 marks)
[Answer and show workings here]
- What is the cost of MFC ordinary shares? (3 marks)
[Answer and show workings here]
- What is MFCs cost of retained earnings based on the CAPM? (3 marks)
[Answer and show workings here]
- What is MFCs WACC? (5 marks)
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Accounting For Payroll
Authors: Steven M. Bragg
1st Edition
0471251089, 9780471251088
