Question 5 (11 marks)

The following information is available for the capital structure of Nice Fashion Group:

Debt financing: a corporate bond issue that pays 10.5% annual coupon rate with an annual before-tax yield to maturity of 11%. The bond issue has face value of $1,000 and will mature in 20 years.

Equity financing: an ordinary share issue of which the company management plans to pay a $5.50 dividend per share in the next financial year. The firm is maintaining 5% annual growth rate in dividends, which is expected to continue indefinitely.

Required:

a) Calculate the current price of the corporate bond for the Nice Fashion Group?

b) Calculate the current value of the ordinary share of the Nice Fashion Group if the average return of the shares in the same industry is 13.5%

c) Calculate the current market value (rounded off to the nearest whole number) and capital structure of the Nice Fashion Group if there are 3,000 bonds and 25,000 shares available on market now (rounded off to two decimal places).

d) Compute the weighted average cost of capital (WACC) under the classical tax system for the Nice Fashion Group, given the company tax rate of 30%