Question: question 4b 5 marks magnum ltd has the following capital...
QUESTION 4B (5 marks):
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:
a) Calculate the current market value (rounded off to the nearest whole number). (2 marks)
b) Calculate the capital structure of the company. Identify the total weights of equity funding (rounded off to two decimal places) (1 mark)
c) 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. (2 marks)