QUESTION THREE

MG Ltd has the following capital situation:of $15\%//$ year. They had a fifteen year term and $$1000$ face value. They

are now selling to yield $10\%$ but interest is paid annually.

Preferred stock: $4000$ shares of preference stock are outstanding, each

paying an annual dividend of $15\%$ on face value of $$50.$ They are now

selling to yield $13\%.$

Equity: MG Ltd has $200000$ shares of common stock outstanding,

currently selling at $$\frac{15}{?}$ share. The estimated cost of equity is $20\frac{\%}{?}$ year.

Required

a$)$ Determine MG Ltd$\text{'}$s market value based capital structure. $(8$ marks$)$

b$)$ Using market values, calculate the after tax cost of the debt for the

firm. $(2$ marks$)$

c$)$ Compute MG Ltd$\text{'}$s weighted average cost of capital, using market values

and what advice can you give the company regarding a potential capital

project with an expected rate return of $15,5\%$ per annum? $(3$ marks$)$

d$)$ Calculate the capital gearing ratio of this company assuming preference

shares are cumulative in nature. $(3$ marks$)$

e$)$ What advice would you give the company, given that the average gearing

for this industry is $30\%?(4$ marks$)$