Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

please show working out step by step using proper finance terminology and don't use excel Question 4 (Total 20 marks) Moon Lid has decided to

image text in transcribed

please show working out step by step using proper finance terminology and don't use excel

Question 4 (Total 20 marks) Moon Lid has decided to use the weighted average cost of capital (WACC) to discount the after-tax cash flows associated with project evaluation. You have been given the task of determining the after-tax WACC of the firm. You are informed that Moon Ltd uses the following securities to fund its operations . 10,000 individual bonds with a face value of $1,000 that will mature in 5 years' time and offer a coupon that is paid half-yearly. The coupon rate for these bonds is 8% per annum. The current market interest rate for these bonds is 6% per annum 700,000 ordinary shares which recently paid a dividend of 20 cents. Dividends are expected to grow at 5% per annum perpetually. The beta of Moon Ltd is 1.2, the risk-free rate is currently 3% per annum, and the expected return on the market is 12% per annum 300,000 preference shares, which pay an annual dividend of 0.5% on a stated value of $100. Each preference share is trading at a market price of $8. The company tax rate is 30% Required: a) For each source of finance, compute the market value and after-tax cost. (12 marks) b) Compute the WACC based on the computations from (a) (4 marks) c) Discuss two conditions to be met for a company's cost of capital to be used as a new project's cost of capital (2 marks) d) Discuss how interest expense is incorporated into the calculation of the NPV (2 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Financial Management

Authors: Cheol Eun

9th Edition

1260788865, 9781260788860

More Books

Students also viewed these Finance questions

Question

What are the three sections useful for simplifying a display?

Answered: 1 week ago