Question
Neaptide Ships Ltd. Financial statements report the following capital structure: It's somewhat risky shares have a beta of 1.50 in a market that expects the
Neaptide Ships Ltd. Financial statements report the following capital structure:
It's somewhat risky shares have a beta of 1.50 in a market that expects the market portfolio to return 8% in the next year. Treasury bills currently yield 2%.
A)
What is the expected rate of return for Neaptide's common shares?
Bonds
Preferreds Common stock Retained earnings
$100,000,000 25,000,000 25,000,000 50,000,000
The bonds have an annual coupon payable at the rate of 8% and mature in 8 years. A new issue of bonds suggests a current market yield of 5%. Any new issue of bonds will be purchased by the underwriter at $980 each.
The preferreds of which there are 1,000,000 outstanding currently trade at $20. The dividend is currently set at $0.90. Flotation expenses on a new issue will be 4%.
There are currently 10 million common shares outstanding. The shareswill payan annual dividend of $0.81 over the next year and the dividend growth rate for Neaptide is estimated to be 5.0% for the foreseeable future. Shares are priced efficiently based on the CAPM. Any new issue of common shares will require flotation expenses of 6%.
At the current time Neaptide's cash flow from its operations not sufficient for any capital projects. Neaptide's tax rate is 30 percent.
B)Calculate the Neaptide's WACC based on market values.
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