QUESTION 2

MBS a B-rated company has the following capital structure:

ZMWM

Ordinary shares (ZMW0.25) 50

8% ZMW 1000 REDEEMABLE BONDS 60

10% Bank loan 40

TOTAL capital employed 200

The ordinary shares are currently trading at ZMW 1.40 ex-div per share. The company faces a tax rate of 25%. The bonds are currently quoted at ZMW 1000 redeemable at par in 10 y ears time. The yield on a 10-year government bond is 6,5% while the market return is 12%. The beta value of the firms shares is 0.95.

REQUIRED:

1. Calculate WACC for MBS
2. The traditional view of capital structure is based on the mix of equity and debt is expected to have an influence on the overall cost of capital and subsequently affect the value of business. In your own words discuss the traditional view of the capital structure with the support of an appropriate diagram.