Use thefollowinginformationaboutExtremeLtd.'s capital structure to answer the questions below;

Extreme's capital structure is made up of:

CAPITAL STRUCTURE

DEBT

• Bonds

EQUITY

• Preference Shares
• Ordinary Shares

• Extreme Ltd. has120,000bondsoutstandingwithafacevalueof$100each. These bonds have3yearstomaturity andpayanannualcoupon of 6%.Extreme'sstatutorycorporatetaxrateis30%.

Moody's Corporation is one of a bigratingsagency 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.hasissued7millionpreference shares, which pay anannualdividend per share of $0.25.Theyare currentlytradingat$2each.

• Extreme Ltd.hasissued10millionordinaryshares,whicharecurrentlytradingat$4 each.Shareholders are to receive a dividend of $0.60 per share in the current year,andthisdividendisestimatedtogrowataconstantrate of3%inperpetuity.

NOTE:Round all dollar amounts to the nearest dollar and all percentages to two decimal places.

Question1

WhatisExtreme's aftertaxcostofdebt? (1 mark)

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Question2

Whatisthevalueof Extreme'sbonds?(1 mark)

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Question3

Whatisthemarketvalueof Extreme'spreferenceshares? (1 mark)

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Question4

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Whatis Extreme'scostofpreferenceshares? (1 mark)

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Question5

Whatisthemarketvalueof Extreme'sordinaryshares? (1 mark)

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Question6

Whatis Extreme'scostofordinaryshares? (1 mark)

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Question7

Whatis Extreme'sWACC (Weighted Average Cost of Capital)?Show workings.(2 marks)

Question8

Assume the preference shares issued by Extreme Ltd. arecumulative. Assume the company doesn't 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)