Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question Pacific Coconuts Ltd. is an investment company that is considering expanding their business, and as such, is reviewing their current financing mix and the

Question

Pacific Coconuts Ltd. is an investment company that is considering expanding their business, and as such, is reviewing their current financing mix and the costs of their sources of finance.

The latest balance sheet for the company shows:

Long-term debt $

Bonds: Par $100, annual coupon 9% p.a., 6 years to maturity 3,000,000

Equity

Preference shares (500,000 shares outstanding, 40 cents per share dividend) 2,000,000

Ordinary shares (10,000,000 shares issued) 10,000,000

Total 15,000,000

The companys debt (bonds) currently sell for $104.62, while the preference shares currently sell for $3.89

Pacific Coconuts wishes to re-estimate the value of their shares based on historical cost of equity and dividend growth values. Historically, the cost of equity averages 15% p.a., while the growth of dividends is estimated at 4% per year and is expected to continue to do so in the future. Pacific Coconuts has recently paid a dividend of 15 cents.

The company's tax rate is 30%.

(a) Using current market and expected (calculated) values, determine the market value proportions of debt, preference shares and ordinary equity comprising Pacific Coconuts capital structure.

(b) Calculate the after-tax costs of capital for each source of finance.

(c) Determine the after-tax weighted average cost of capital for the company.

(d) Using your knowledge of the costs of finance capital, identify what you expect to happen to the weighted average cost of capital if additional costs are incurred in the securing new equity finance? If you need you can show the expectation numerically using the answers from (a) (c).

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Management For Public Health And Not For Profit Organizations

Authors: Steven A. Finkler

1st Edition

0130176141, 9780130176141

More Books

Students also viewed these Finance questions