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n preference shares in issue that pay a fixed c ear, 7% coupon bonds in issue, the bonds ha

n preference shares in issue that pay a fixed c ear, 7% coupon bonds in issue, the bonds ha

Essentials Of Investments
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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Glaxo Plc is listed on the London Stock Exchange. It has 20 million ordinary shares in issue that have a nominal value of £1 each and a market value of £3 per share, the company has just paid an annual dividend of 5p and expects dividends to grow at a rate of 7.5% per year. Cedar Plc also has 10 million preference shares in issue that pay a fixed dividend of 6p per year. Finally Cedar has 10-year, 7% coupon bonds in issue, the bonds have a total market value of £30 million and a yield to maturity of 5%. The current rate of corporation tax is 25%. a) Calculate the market value of the equity (ordinary shares) for Cedar Plc. b) Calculate the cost of capital on the equity for Cedar Plc. c) If the cost of capital on the preference shares of Cedar is 7%, calculate the total market value of the preference shares of the company. d) Calculate the weighted average cost of capital (WACC) for Cedar Plc.
Transcribed Image Text:Glaxo Plc is listed on the London Stock Exchange. It has 20 million ordinary shares in issue that have a nominal value of £1 each and a market value of £3 per share, the company has just paid an annual dividend of 5p and expects dividends to grow at a rate of 7.5% per year. Cedar Plc also has 10 million preference shares in issue that pay a fixed dividend of 6p per year. Finally Cedar has 10-year, 7% coupon bonds in issue, the bonds have a total market value of £30 million and a yield to maturity of 5%. The current rate of corporation tax is 25%. a) Calculate the market value of the equity (ordinary shares) for Cedar Plc. b) Calculate the cost of capital on the equity for Cedar Plc. c) If the cost of capital on the preference shares of Cedar is 7%, calculate the total market value of the preference shares of the company. d) Calculate the weighted average cost of capital (WACC) for Cedar Plc.
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