Question 5 (11 marks)

The following information is available for Blue Sea company's capital structure:

Bond

$5,500,000 book value of corporate bond that pays coupon rate of 10% annually.

The bond will be mature in 25 years.

The year-to-maturity (YTM) of the bond is 9.5%.

The face value of the bond is $1,000.

Ordinary Shares

70,000 outstanding ordinary shares which just paid a dividend of $8 per share.

Company assume a constant dividend growth rate of 3% each year continuously.

Other information

The company marginal tax rate is 30%

The company has no plan to issue new shares or debt instruments.

Required:

a. Calculate the market value of the bond. (4 marks)

b. Calculate the share value if the market required rate of return for the similar shares in the same industry is 11%. (2 marks)

c. Calculate the current market value of the company. (1 mark)

1. Calculate the company's capital structure. (2 marks)

Caluclate the weighted average cost of capital (WACC) for the company, assuming classical tax system is applied.