The following information is available for the capital structure of TestraQ Group: Debt: $3,500,000 par value of outstanding corporate bonds that pay a semi-annual 11.5% coupon rate with an annual before-tax yield to maturity of 10%. The bond issue has a face value of $1,000 and will mature in 30 years. Ordinary shares: 75,000 outstanding ordinary shares which just paid a $4.50 dividend per share in the current financial year. The firm is maintaining 9% annual growth rate in dividends, which is expected to continue indefinitely. Prefered share: 42 000 preference shares with a 13% fixed dividend rate, face value of $100, market price of $123. Required: Complete the following tasks: Identify the cost of each funding source of TestraQ Group in case the company would like to raise new funds, using CAPM for calculation the cost of ordinary equity, assuming that an unfavourable economic condition post- Covid 19 pandemic has increased the share beta to 1.2, risk-free rate of return is 7% and market risk premium is 6.5%. Compute the weighted average cost of capital (WACC) under the classical tax system for the TestraQ Group, given the company tax rate of 35%.
The following information is available for the capital structure of TestraQ Group: Debt: $3,500,000 par value of outstanding corporate bonds that pay a semi-annual 11.5% coupon rate with an annual before-tax yield to maturity of 10%. The bond issue has a face value of $1,000 and will mature in 30 years. Ordinary shares: 75,000 outstanding ordinary shares which just paid a $4.50 dividend per share in the current financial year. The firm is maintaining 9% annual growth rate in dividends, which is expected to continue indefinitely. Prefered share: 42 000 preference shares with a 13% fixed dividend rate, face value of $100, market price of $123. Required: Complete the following tasks: Identify the cost of each funding source of TestraQ Group in case the company would like to raise new funds, using CAPM for calculation the cost of ordinary equity, assuming that an unfavourable economic condition post- Covid 19 pandemic has increased the share beta to 1.2, risk-free rate of return is 7% and market risk premium is 6.5%. Compute the weighted average cost of capital (WACC) under the classical tax system for the TestraQ Group, given the company tax rate of 35%.
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 7P
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The following information is available for the capital structure of TestraQ Group:
Debt: $3,500,000 par value of outstanding corporate bonds that pay a semi-annual 11.5% coupon rate with an annual before-tax yield to maturity of 10%. The bond issue has a face value of $1,000 and will mature in 30 years.
Ordinary shares: 75,000 outstanding ordinary shares which just paid a $4.50 dividend per share in the current financial year. The firm is maintaining 9% annual growth rate in dividends, which is expected to continue indefinitely.
Required: Complete the following tasks:
- Identify the cost of each funding source of TestraQ Group in case the company would like to raise new funds, using
CAPM for calculation thecost of ordinary equity , assuming that an unfavourable economic condition post- Covid 19 pandemic has increased the share beta to 1.2, risk-freerate of return is 7% and market risk premium is 6.5%. - Compute the weighted average cost of capital (WACC) under the classical tax system for the TestraQ Group, given the company tax rate of 35%.
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