Osborne Construction currently has the following capital structure: Debt: $20,500,000 paying 9.5% coupon bonds outstanding with 15 years to maturity, an annual before-tax yield to maturity of 8% on a new issue. The bonds currently sell for $1,125 per $1,000 face value. Ordinary Shares: 100,000 shares outstanding currently selling for $45 per share. The company just paid a $3.50 dividend per share and is experiencing a 5% growth rate in dividends, which it expects to continue indefinitely. (Note: The firm's marginal tax rate is 30%.) Required: a) Calculate the current total market value of the company. b) Calculate the capital structure of the company. c) Calculate the weighted average cost of capital (WACC) for the firm. d) Discuss the significance of calculating WACC for this company.
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Osborne Construction currently has the following capital structure:
Debt: $20,500,000 paying 9.5% coupon bonds outstanding with 15 years to maturity, an annual before-tax yield to maturity of 8% on a new issue. The bonds currently sell for $1,125 per $1,000 face value.
Ordinary Shares: 100,000 shares outstanding currently selling for $45 per share. The company just paid a $3.50 dividend per share and is experiencing a 5% growth rate in dividends, which it expects to continue indefinitely.
(Note: The firm's marginal tax rate is 30%.)
Required:
-
a) Calculate the current total market value of the company.
-
b) Calculate the capital structure of the company.
-
c) Calculate the weighted average cost of capital (WACC) for the firm.
-
d) Discuss the significance of calculating WACC for this company.
Step by step
Solved in 6 steps
