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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
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
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