Question
The current share price of Jurong Parts is $8.00 and last years dividend was $0.20. It also issued preferred shares several years ago, which pays
The current share price of Jurong Parts is $8.00 and last years dividend was $0.20. It also issued preferred shares several years ago, which pays a dividend of $0.33 per share and currently trades at $4.50 per share.
Security analysts are projecting that the ordinary dividends will grow at a rate of 5% a year. The firm also issued 10-year 6% coupon (semi-annual) bonds two years ago. The face value is $1,000 and the last traded price was $990.
The market risk premium is 6%, the risk-free rate is 3%, and Jurong Parts beta is 0.8. The firm uses a target capital structure with 45% debt, 5% preferred shares and 50% ordinary shares. The firms marginal tax rate is 17%.
(b) Calculate the cost of preference share and cost of debt.
(10 marks)
(c) Calculate the weighted average cost of capital (WACC). In doing so, use the average cost of equity derived in part (a).
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