Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Question

b)  Calculate the cost of preferred shares for Y capital structure.

 

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% $18.00 0.75 1.5
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Transcribed Image Text:Mentone Global Corporation (MGC) is attempting to evaluate two alternative capital structures – X and Y. The following table shows the two structures along with relevant cost data. The company is subject to a 35% tax rate. The risk-free rate is 4% and the market return is currently 9%. Item ($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
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Step 1

Data for cost of preferred shares for Y capital structure.

 

Preferred share capital = $ 15 million

Preferred share dividend = $ 1.80 million

Preferred share price = $ 18 million

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