Question
No. of shares issued: 80 million Current price per share: $1.20 Dividend just paid: $0.06 Dividend growth rate: 5% per annum No. of bonds issued:
No. of shares issued: 80 million
Current price per share: $1.20
Dividend just paid: $0.06
Dividend growth rate: 5% per annum No. of bonds issued: 50,000
Par value of each bond: $1,000
Coupon rate: 5%
Current yield to maturity: 4.5%
Time to maturity: 3 years Market data: 10-year government bond yield: 2%
Equity risk premium: 5%
Corporate tax rate: 20%
(a) Employ the dividend growth model to determine FLGs cost of equity. (3 marks) (b) Use the capital asset pricing model (CAPM) to determine FLGs cost of equity. (3 marks) (c) Discuss the suitability of the dividend growth model and the capital asset pricing model (CAPM) based on the assumptions used to compute the cost of equity. (6 marks) (d) Compute FLGs weighted average cost of capital. (10 marks) (e) Explain why the cost of equity is greater than the cost of debt. (5 marks) (f) Discuss whether changing the capital structure can lead to reduction in FLGs cost of capital and increase the value of the company.
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