Question 5 (11 marks)

Green Mountain Ltd. currently has the following capital structure:

Debt funding: An outstanding bond with face value of $1, 000, paying annually 9.5% coupon rate with an annual before-tax yield to maturity of 9%. The bond issue has total book value of $2,500,000 and will mature in 15 years.

Ordinary equity funding: Totally 60,000 outstanding shares, paying a constant growing dividend rate of 3% annually. The firm just paid a $2.50 dividend per share in the current financial year.

Hybrid funding: Totally 55,000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 14.5%.

Company tax rate is 30%.

Required: Complete the following tasks:

1. Calculate the current price of the corporate bond? (3 marks)

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2. Calculate the current price of the ordinary share if the average return of the shares in the same industry is 11.5%? (2 marks)

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3. Calculate the current value of the preferred share if the average return of the shares in the same industry is 10.5% (2 marks)

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4. 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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5. Compute the weighted average cost of capital (WACC) under the traditional tax system for the firm (2 marks)

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