Question 5 (11 marks)
5.1. (2 + 2 = 4 marks)
Suppose a company paid dividend of 15 cents on its ordinary share of N$1.50 each. The company expected to grow its dividend by 6% per year indefinitely in future. Determine the value of an ordinary share if the shareholders expect a return of 14% per annum.
5.2. (2 + 2 + 3 = 7 marks)
ABC Ltd issued a bond with face value of N$1 000 with a coupon rate of 12% per annum. Coupon is paid annually. The expected rate of return on similar bonds is 10% per annum. Determine the value of a bond when (a) issued in perpetuity, (b) redeemable in six years’ time, (c) redeemable in five years’ time at a premium of 10%.
Question 6 (2 + 3 + 2 = 7 marks)
Suppose you have been recently appointed as the financial analyst of Company D Ltd, which was recently formed to manufacture a new product. It has the following capital structure:
Common Stock of N$100 each N$ 40,000
7% Bonds of N$100 each N$ 25,000
9% Preferred Stock of N$100 each N$ 25,000
Retained Earnings N$ 10,000
Total N$ 1 00,000
The Company has earned N$ 20 per share on common stock. The tax rate is 50% and the shareholders’ personal tax bracket is 25%. Calculate the weighted average cost of capital.