Magnum Ltd has the following capital structure: Ordinary Equity: 68 000 ordinary shares outstanding at a market price of $35 per share. The shares have just paid a $1.85 annual dividend and have a dividend growth rate of 2.5%. Preference Equity: There are 15 000 preference shares with an 8

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
icon
Related questions
Question

):  Magnum Ltd has the following capital structure:

Ordinary Equity: 68 000 ordinary shares outstanding at a market price of $35 per share. The shares have just paid a $1.85 annual dividend and have a dividend growth rate of 2.5%.

Preference Equity: There are 15 000 preference shares with an 8% dividend rate, outstanding at a market price of $75 a share. The preference shares have a par value of $100.

Debts: The outstanding bonds mature in 20 years, have a total face value of $850 000, a face value per bond of $1000 and a market price of $1196.4 each. The bonds have before tax YTM 8%.

The marginal tax rate of the firm is 35%. Required:

  1. Calculate the current market value (rounded off to the nearest whole number). (2 marks)
  2. Calculate the capital structure of the company. Identify the total weights of equity funding (rounded off to two decimal places) (1 mark)
  3. Compute the weighted average cost of capital (WACC) under the traditional tax system for the company, using dividend constant growth model for calculation the cost of ordinary equity. (2 marks)

 

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 5 steps

Blurred answer
Knowledge Booster
Earning per share and Dilutive securities
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education