Question 5

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.

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

c.Calculate the current market value of the company.

d Calculate the company's capital structure.

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