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Burwood Investment Limited has: ---8 million shares of common stock outstanding, the price is $32 and...

Burwood Investment Limited has:
---8 million shares of common stock outstanding, the price is $32 and beta is 1.15. Market risk premium is 10%, T-bills are yielding 5%.
---0.5 million shares of 6% preferred stock outstanding, the price is $67.
---100,000 of 9% semi-annual bonds outstanding, 15 years to maturity, and sell for 91% of par. The current yield to maturity on these bonds is 10.18%p.a.
a) If the applicable tax rate is 35% p.a. what is the capital structure of the firm?
b) What is the firm’s WACC?

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Answer #1

No. outstanding million Particulars Current price Market value Weights 2 Equity 3 Preferred stock 4 8,000,000 500,000 100,000 8,600,000 32 67 91 256,000,000 33,500,000 9,100,000 298,600,000 85.7% 11.2% 3.0% 100.0% Debt 6 7 Capital structure Equity Preferred stock 256,000,000 33,500,000 9,100,000 298,600,000 10 Debt 11 Total 12 Cost of capital (pre- Cost of capital (post-tax) Weighted cost of capital Particulars Weights 13 14 Equity* tax 85.7% 11.2% 3.0% 100.0% 10.75% 8.96% 10.18% 10.75% 8.96% 6.62% 9.2% 1.0% 0.2% 10.4% Preferred stock ** 16 Debt 17 18 19 * Cost of equity Risk free rate Beta * (Market risk premium risk free rate) 20 Risk free rate 21 Market risk premium 22 Beta 23 Cost of equity 24 25 Cost of preferred stock Coupon market price 26 Coupon 27 Market price 28 Cost of preferred stock 29 5% 10% 1.15 10.75% 6 67 8.96%Particulars No. outstanding (million) Current price Market value Equity Preferred stock Debt -C2 D2 C3 D3 EZ/SE$5 -8 106 -0.5 10-6 100000 SUM(C2:C4) 32 67 #9196*100 E4/SES5 SUM(F2:F4) SUM(E2:E4) Capital structure Equity -E3 -E4 SUM(C8:C10) d stock 12 Particulars Weights Cost of capital (pre-tax) Cost of capital (post-tax) Weighted cost of capital 13 Equity Preferred stock** EC23 -C28 0.1018 -014 -D15 -D16*11 3596) E14 C14 E15 C15 -E16 C16 SUM(F14:F16) 17 SUM(C14:C16) 19 Cost of equity Risk tree rate Beta (Market risk premium risk free rate) Risk free rate 0.05 0.1 1.15 C20+C22 (C21-C20) 21 23 24 25 26 27 28 29 Market risk premium Cost of equity *Cost of preferred stock Market price Couponmarket price 67 Cost of preferred stock C26/C27

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