Question 3

The following information is extracted from Farm Fresh LTD.

• Per the company's financial records, they have $3,000,000 in bonds (Face value). The agreed coupon payment is 9% per annum, and the before-tax yield to maturity is 8%. This bond is selling at $115 per share, and the face value of each bond is $100.

• The company has 46,000 outstanding Ordinary shares, and currently selling for $50 per share. The firm expects to pay a $5.50 dividend per share one year from now and is experiencing a 4% growth rate in dividends, which it expects to continue indefinitely.

The firm's marginal tax rate is 30%. The company has no plans to issue new securities.

Required:

1. Calculate the current total market value of the firm.

ANSWER a:

1. Calculate the weighted average cost of capital (WACC) for the firm.

ANSWER b:

1. Why is it important to use market-based weights rather than balance sheet weights when estimating a company's weighted average cost of capital?

ANSWER c:

1. Why would it be inappropriate for the company's management to use the WACC calculated above for the evaluation of a new project with different risks from the current projects

ANSWER d: