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
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
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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
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:
- Calculate the current market value (rounded off to the nearest whole number). (2 marks)
- Calculate the capital structure of the company. Identify the total weights of equity funding (rounded off to two decimal places) (1 mark)
- 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)
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