Question
Your CFO has asked you to calculate the WACC for a new entity through which you will be financing your expansion project. The new entitys
Your CFO has asked you to calculate the WACC for a new entity through which you will be financing your expansion project. The new entitys capital structure is in three parts as follows: - it will issue 500,000 ordinary shares. Dividend will start to be paid in Year 2. The first dividend will be 1.1, and will grow at 3% per annum in perpetuity. Investors will require at least 10% return.
- It will issue 1,000,000 1 preference shares trading at par. To estimate their required rate of return on equity, preference shareholders will use the Capital Asset Pricing Model, and assume a risk-free rate of 1.5%, a market return of 10%, and a stock beta of 1.2.
- It will issue 100,000 bonds. Each bond will have a face value of 100 with 5 years to maturity, and pay an annual coupon of 6%. Assume that the marginal tax rate is zero. You know that investors require a 7% return on bonds of the same investment grade. Assume that the companys marginal tax rate is zero.
Required: Calculate the WACC. Show your workings [9 marks].
(b) Outline key differences between futures and forwards [9 marks].
[Maximum word count: 375 words]
(c) Explain and discuss the clientele theory of dividend policy [7 marks].
[Maximum word count: 375 words]
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