Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You have just started working as a financial advisor for LAE Aeronautical Ltd. On your first day of work, your boss provides you with the

You have just started working as a financial advisor for LAE Aeronautical Ltd. On your first day of work, your boss provides you with the following details regarding the capital structure of the company as in the book-value balance sheet:

Liabilities $
Short-term loans payable (interest rate 5% p.a. compounded quarterly) $20 million
1500 corporate bonds (the face value of each is $100,000) $150 million
Shareholders' equity
Common stock (12 million shares, issued at $25 each) $300 million
Preferred stock (2 million 7% shares, issued at $35 each) $70 million
  • These corporate bonds pay semi-annual coupons at a rate of 6% per annum and will mature exactly 10 years from today. The current yield to maturity on these bonds is 8% per annum.
  • The current price of a common share is $28. The company is expected to pay a dividend of $1.8 per share next year and maintain the same annual dividend payment of $1.8 per share in perpetuity.
  • The market price of a preference share is $40.
  • The company tax rate is 30%.

a. Calculate the after-tax weighted average cost of debt for LAE Ltd. (4 marks)

b. Calculate the weighted average cost of equity for LAE Ltd. (4 marks)

c. Calculate the after-tax weighted average cost of capital for LAE Ltd. (2 marks)


Step by Step Solution

3.45 Rating (158 Votes )

There are 3 Steps involved in it

Step: 1

a Aftertax Weighted Average Cost of Debt WACD The aftertax cost of debt is the interest rate on the ... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting

Authors: LibbyShort

7th Edition

78111021, 978-0078111020

More Books

Students also viewed these Finance questions