am Ltd has just commenced operations with the following capital structure: Image attached Additional information: The debentures with ten years to maturity and a $100 par value pay a semi-annual coupon rate of 8% per annum and were issued at a price of $97.00 each. The term of the mortgage loan is twenty years and the monthly repayment is $12,000 so that the loan (with interest) will be fully repaid at maturity. The new preference shares have a 9% annual dividend with a $5.00 par value were sold at $4.80 per share. In addition, flotation costs of $0.10 per share had to be paid. Due to popular demand for the company’s ordinary shares, they traded at $2.20 each immediately after the new issue. The company’s prospectus contains estimates that it will earn $500,000 in the first year and will pay dividends of 20 cents per share. Brokers anticipate that dividends will grow at 5% per annum indefinitely. The company income tax rate is 30 cents in the dollar. You are required to calculate the after-tax weighted average cost of capital for Sam Ltd.
am Ltd has just commenced operations with the following capital structure: Image attached Additional information: The debentures with ten years to maturity and a $100 par value pay a semi-annual coupon rate of 8% per annum and were issued at a price of $97.00 each. The term of the mortgage loan is twenty years and the monthly repayment is $12,000 so that the loan (with interest) will be fully repaid at maturity. The new preference shares have a 9% annual dividend with a $5.00 par value were sold at $4.80 per share. In addition, flotation costs of $0.10 per share had to be paid. Due to popular demand for the company’s ordinary shares, they traded at $2.20 each immediately after the new issue. The company’s prospectus contains estimates that it will earn $500,000 in the first year and will pay dividends of 20 cents per share. Brokers anticipate that dividends will grow at 5% per annum indefinitely. The company income tax rate is 30 cents in the dollar. You are required to calculate the after-tax weighted average cost of capital for Sam Ltd.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Sam Ltd has just commenced operations with the following capital structure:
Image attached
Additional information:
- The debentures with ten years to maturity and a $100 par value pay a semi-annual coupon rate of 8% per annum and were issued at a price of $97.00 each.
- The term of the mortgage loan is twenty years and the monthly repayment is $12,000 so that the loan (with interest) will be fully repaid at maturity.
- The new
preference shares have a 9% annual dividend with a $5.00 par value were sold at $4.80 per share. In addition, flotation costs of $0.10 per share had to be paid. - Due to popular demand for the company’s ordinary shares, they traded at $2.20 each immediately after the new issue.
- The company’s prospectus contains estimates that it will earn $500,000 in the first year and will pay dividends of 20 cents per share. Brokers anticipate that dividends will grow at 5% per annum indefinitely.
- The company income tax rate is 30 cents in the dollar.
You are required to calculate the after-tax weighted average cost of capital for Sam Ltd.
Transcribed Image Text:Sam Ltd: Balance Sheet at date of incorporation
Assets
Sundry assets
5,000,000
Liabilities and Shareholders' funds
8% Debentures, $100 par value
500,000
Mortgage loan
9% Preference shares, $5 par value
1,000,000
500,000
Ordinary shares, issued and paid up at $2
3,000,000
5,000,000
%24
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