Question 4 (7 marks)

The following information is available for the capital structure of TestraQ Ltd:

• 75,000 ordinary shares outstanding at a market price of $82 a share. The shares have just paid a $5.85 annual dividend and have a dividend growth rate of 5% annually.

• 62,000 preference shares with an 8% fixed dividend, outstanding at a market price of $78 a share. The preference shares have a par value of $100.

• The outstanding bonds have a total face value of $3,500,000. The bonds have a face value per bond of $1000 and a market price of 102.5% of face. The bonds before tax YTM is 8.5%. The corporate marginal tax rate for the company is 35%.

Required:

1. Calculate the current market value (rounded off to the nearest whole number) and capital structure of the TestraQ Ltd. (rounded off to two decimal places). (2 marks)

2. Calculate the cost of each funding source or TestraQ Ltd. if the company wants to raise new funds, using the dividend constant growth model to calculate the cost of ordinary equity. (2 mark)

3. Compute the weighted average cost of capital (WACC) under the classical tax system for TestraQ Ltd. (3 marks)