Use the following information about Extreme Ltd.s capital structure to answer the questions below;

Extremes capital structure is made up of:

	CAPITAL STRUCTURE
DEBT	Bonds
EQUITY	Preference Shares Ordinary Shares

• Extreme Ltd. has 120,000 bonds outstanding with a face value of $100 each. These bonds have 3 years to maturity and pay an annual coupon of 6%. Extremes statutory corporate tax rate is 30%.

Moodys Corporation is one of a big ratings agency which has given Extreme Ltd. a debt rating of AAA. The following table shows the risk premium available in the market based on debt ratings:

Debt rating	Risk premium
AAA	5.0%
AA	6.5%
BBB	7.2%
BB	7.5%

• The risk free rate is 1%.

• Extreme Ltd. has issued 7 million preference shares, which pay an annual dividend per share of $0.25. They are currently trading at $2 each.

• Extreme Ltd. has issued 10 million ordinary shares, which are currently trading at $4 each. Shareholders are to receive a dividend of $0.60 per share in the current year, and this dividend is estimated to grow at a constant rate of 3% in perpetuity

1.What is Extreme's aftertax cost of debt? (1 mark)

2.What is the value of Extreme's bonds? (1 mark)

3.What is the market value of Extreme's preference shares? (1 mark)

4.What is Extreme's cost of preference shares? (1 mark)

5.What is the market value of Extreme's ordinary shares? (1 mark)

6.What is Extreme's cost of ordinary shares? (1 mark)

7.What is Extreme's WACC (Weighted Average Cost of Capital)? Show workings. (2 marks)

8. Assume the preference shares issued by Extreme Ltd. are cumulative. Assume the company doesnt pay any dividends this year on both Preference and Ordinary Shares. Nonetheless, next year, the company estimates that $4 million will be available to be paid out as dividends. Calculate the dividends per share the ordinary shareholders are expected to receive next year. Show workings. (2 Marks)