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Doubled Ltd has 4
Doubled Ltd has 4.2 million ordinary shares on issue trading at $5.56, and 750,000 preference shares on issue trading at $7.39. Doubled Ltd is a dividend-paying company. The growth rate in ordinary dividends is 3%, and the company has just paid an ordinary dividend of $0.55 per share. The preference shares pay a constant dividend of $1.00 per share. The market risk premium is 7% and the risk-free rate is 7%. Doubled Ltd is a levered company with 150,000 $1000 par value bonds on issue, which will mature in 4 years. The coupon rate on Doubled's debt is 8% paid semi-annually and are currently trading at $1152.36. The corporate tax rate is 30%. a. Calculate the capital structure weights (1 mark) Click or tap here to enter text. b. Calculate the cost of equity (1 mark) Click or tap here to enter text. c. Calculate the cost of the preference shares (1 mark) Click or tap here to enter text. d. Calculate the cost of debt (2 marks)
Expert Solution
Question A
Market value of Common equity = Share outstanding *share price = 4200000 * 5.56 = 23352000
Market value of Debt= bonds outstanding *share price = 150000 * 1152.36 = 172854000
Market value of Preferred equity = Share outstanding *Bond price = 750000 * 7.39 = 5542500
Total capital = sum of all market values of assets = 23352000 + 172854000 + 5542500 = 201748500
Weight of Common equity= Portion of common equity/ Total capital = 23352000 / 201748500 = 0.11574807247 = 11.57%
Weight of Bond = Portion of Bond/ Total capital = 172854000 / 201748500 = 0.8567796043 =85.68%
Weight of Preferred equity= Portion of Preferred equity/ Total capital = 5542500 / 201748500 = 0.02747232321 = 2.75%
Question B
Cost of Equity = [Dividend*(1+growth)/Price] + Growth =[0.55*(1+0.03) / 5.56] + 0.03 = 0.1018884892 + 0.03= 13.19%
Question C
Cost of Preferrence share = Dividend/Price = 1/7.39= 13.53%
Question D
Cost of debt or YTM= Interest + (Face- Selling price)/ years / (Face + selling price)/2
Interest= COupon rate / Frequency * face value= 8%/2 * 1000 = 40
Years= Frequency * years = 4*2= 8
YTM = 40 +[ (1000-1152.36) / 8] / (1000+1152.36)/2
= 40 + -152.36 /8 / 1076.18
= (40 -19.045) / 1076.18
YTM= 0.01947164972 => for semi annual
YTM = 0.01947164972 * 2 = 3.89% => for Annual
After tax cost of debt = YTM * (1-tax rate ) = 3.89*(1-0.3) = 2.72%
After tax cost of debt = 2.72%
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