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Homework answers / question archive / TALAMO FOODS Pty ltd has a total value of $ 1 million made of 50% common stock and 50% debt in forms of bonds

TALAMO FOODS Pty ltd has a total value of $ 1 million made of 50% common stock and 50% debt in forms of bonds

Finance

TALAMO FOODS Pty ltd has a total value of $ 1 million made of 50% common stock and 50% debt in forms of bonds. The bonds has a face value of $ 1000, pay 10% coupon per annum, matures in 10 years with yield to maturity (YTM) of 12%. TALAMO FOODS dividends are expected to grow at the constant rate of 5% and they just paid dividends of $ 5 per share. The ex-dividend price is $ 25 per share. TALAMO FOODS tax rate is 35%.

i. Calculate TALAMO FOODS cost of Equity. [3]

ii. Calculate TALAMO FOOD weighted average cost of capital (WACC)

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1. cost of equity=(D1/share price)+growth rate

D1=D0*(1+growth rate)=5*(1+5%)=5.25

cost of equity=(5.25/25)+5%=21%+5%=26%

2. WACC=(weight of equity*cost of equity)+(weight of debt*after tax cost of debt)

after tax cost of debt=yield to maturity*(1-tax rate)=12%*(1-35%)=7.8%

WACC=(50%*26%)+(50%*7.8%)=16.9%