Acct 251, Acct 308 The common shares of Nelson Ltd

The common shares of Nelson Ltd. are currently trading at $32.50. Nelson is considered to be a safe investment by most investment analysts. In support of this position, the analysts note that the beta on Nelson's common stock is only 0.7, that it has maintained a steady dividend payout ratio of 0.35 over the past 25 years, and that its earnings have grown at a steady rate of 5% over that same period to reach the earnings of $4 per share, as per the last financial statements. There are 19,000,000 Nelson common shares outstanding. Nelson Ltd. also has 10,000,000 preferred shares outstanding, which are currently trading at $42. These shares have a stated par value of $40, and a stated dividend of $5 per share. Finally, Nelson has a $350,000,000 face value, long-term debt issue outstanding which has 7 years remaining until maturity and which carries a 12% coupon with interest paid semi-annually. The current risk-free rate of interest is 5%, the expected return on the market is 13%, and bonds of similar risk and maturity to those of Nelson's are currently priced to yield 8% to maturity. Management believes that flotation costs would be 3% after tax on new debt and on new preferred shares, and 6% before tax on new common equity. The firm's tax rate is 53%.

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