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
Related questions
Question
c) Calculate the cost of ordinary shares for each capital structure.
Transcribed Image Text:Mentone Global Corporation (MGC) is attempting to evaluate two alternative capital
structures – X and Y. The following table shows the two structures along with relevant cost
data. The company is subject to a 35% tax rate. The risk-free rate is 4% and the market
return is currently 9%.
Item ($Million).
Debt
Y
25
60
Preferred shares
Ordinary shares
Total capital
15
75
25
100
100
Debt (Yield to maturity)
Preferred equity
dividend
Preferred equity (Price)
Ordinary shares beta
6.50%
$1.80
5.00%
$18.00
0.75
1.5
Expert Solution
Step 1
Risk free rate = 4%
Market return = 9%
Beta of X capital structure = 0.75
Beta of Y capital structure = 1.50
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Solved in 2 steps
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