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QUESTION THREE MG Ltd has the following capital situation:of 1 5 % / / year. They had a fifteen year term and $ 1 0

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 $15? share. The estimated cost of equity is 20%? year.
Required
a) Determine MG Ltd'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'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)
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