# Question 2A: Company currently has the following capital structure: Debt funding:Ordinary equity funding

A callable bond that pays annually 10.5% coupon rate with an annual before-tax yield to maturity of 9.7%. The bond issue has face value of $1,000 and will mature in 16 years.

:An ordinary share that just paid a $6.50 dividend per share in the current financial year. The firm is maintaining 4.5% annual growth rate in dividend, which is expected to continue indefinitely.

**Hybrid -funding:** A preferred share with face value of $100, paying fixed dividend rate of 15%.

Required:

a)Calculate the current price of the corporate bond?

b)Calculate the current price of the ordinary share if the average return of the shares in the same industry is 11.5%?

c)Calculate the current value of the preferred share if the average return of the preferred shares in the same industry is 12.5%?

QUESTION 2B: If the company has the following capital structure:

**Ordinary Equity:**68 000 ordinary shares outstanding at a market price of $35 pershare. 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 an8% 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:

a)Calculate the current market value (rounded off to the nearest whole number).

b)Calculate the capital structure of the company. Identify the total weights of equity funding(roundedoff to two decimal places)

c)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.

kindly use the following equations for explanation. no excel please...thanks

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