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%. Required: a) Calculate the after-tax cost of debt for each capital structure. b) Calculate the cost of preferred shares for Y capital structure. c) Calculate the cost of ordinary shares for each 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%. Required: a) Calculate the after-tax cost of debt for each capital structure. b) Calculate the cost of preferred shares for Y capital structure. c) Calculate the cost of ordinary shares for each capital structure.
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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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%.
Required:
a) Calculate the after-tax cost of debt for each capital structure.
b) Calculate the cost of
c) Calculate the cost of ordinary shares for each capital structure.
d) Calculate the after tax Weighted Average Cost of Capital (WACC) for each capital structure.
Transcribed Image Text:Item ($Million)
Debt
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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