Question 3 (10 Marks)

Use the following information about Fresh Ltd.s capital structure to answer the questions below.

Freshs capital structure is made up of:

	CAPITAL STRUCTURE
DEBT	Bonds
EQUITY	Preference Shares Ordinary Shares

Fresh Ltd. has 80,000 bonds outstanding with a face value of $100 each. These bonds have 5 years to maturity and pay an annual coupon of 7.5%. Freshs statutory corporate tax rate is 30%.

Standard and Poor Corporation is one of a big ratings agency which has given Fresh Ltd. a debt rating of AA. The following table shows the current yields available in the market based on debt ratings.

The risk-free rate is 2%.

Debt rating	Risk premium
AAA	5.2%
AA	5.5%
BBB	7.2%
BB	7.5%

Fresh Ltd.has issued 4 million preference shares, which pay an annual dividend per share of $0.375. They are currently trading at $3 each.

Fresh Ltd. has issued 8 million ordinary shares, which are currently trading at $5 each. Shareholders are to receive a dividend of $0.80 per share in the current year, and this dividend is estimated to grow at a constant rate of 2.5% in perpetuity.

NOTE: Round all dollar amounts to the nearest dollar and all percentages to two decimal places.

(i) What is Freshs aftertax cost of debt? (1 Mark)

(ii) What is the value of Freshs bonds? (1 Mark)

(iii) What is the market value of Freshs preference shares? (1 Mark)

(iv) What is Freshs cost of preference shares? (1 Mark)

(v) What is the market value of Freshs ordinary shares? (1 Mark)

(vi) What is Freshs cost of ordinary shares? (1 Mark)

(vii) What is Freshs WACC (Weighted Average Cost of Capital)? (2 Marks)

(viii) Assume the preference shares issued by Organic Ltd. are cumulative. Assume the company doesnt pay any dividends this year on both Preference and Ordinary Shares. Nonetheless, next year, the company estimates that $2 million will be available to be paid out as dividends. Calculate the dividends per share the ordinary shareholders are expected to receive next year? (2 Marks)