a) Equity can form part of a company’s capital structure. What would an investor consider the optimal mix?
b) PaZed Corporation is expected to have a temporary supernormal growth period and then level off to a “normal,” sustainable growth rate forever. The supernormal growth is expected to be 25% for 3 years and then level off to 8% forever. The market requires a 14% return on investment and the company last paid a K 1.60 dividend. What would the market be willing to pay for the stock today?
c) Bushel Recycling Ltd. is a well-established recycling business. The company has the following capital structure: Debt 20%; Preferred stock 15% and Equity 65% .The market attracts interest rates of 15% for debt and 13% for preferred stock, with a corporate tax rate of 35%. The market beta for metal scrap companies is 1.5, while the risk free rate is 12%.The market risk premium is 5%.
Required
Using the CAPM approach, determine the appropriate WACC.
d) ABZ milling company balance sheet shows the following capital structure for 2010
9% Debt K4, 500,000
7% preferred Stock K1, 500,000
Common Stock K1, 000,000
The company last dividend was K4 and is expected to grow at 5 percent yearly and common stock is currently quoted at K40.The corporate tax rate is 33%.
Calculate the weighted average cost of capital (WACC) for Timber limited.