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