Question 3(11 marks)

LintFoxLtd. currently has the following capital structure:

Ordinary shares:55,000 outstanding ordinary shares. The firm just paid a $4.50 dividend per share in the current financial year. The firm is maintaining 2% annual growth rate in dividend indefinitely.

Preferred shares:25000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 14%.

Debt:$1,500,000 par value of uncallable bond that pays annually 9% coupon rate with an annual before-tax yield to maturity of 7.5%. The bond issue has face value of $1,000 and will mature in 7 years.

Company tax rate is 30%.

Required:Complete the following tasks:

a)Calculate the current price of the ordinary share if the average return of the shares in the same industry is 10%? (2 marks)

ANSWER:

b)Calculate the current value of the preferred share if the average return of the shares in the same industry is 11% (2 marks)

ANSWER:

c)Calculate the current price of the corporate bond? (2 marks)

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d)Calculate the current market value (rounded off to the nearest whole number) and capital structure of the firm (rounded off to two decimal places) (2 marks)

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e)Compute the weighted average cost of capital (WACC) under the traditional tax system for the firm, using dividend constant growth model for calculation the cost of ordinary equity (3 marks)

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