Cloudstreet Ltd is an Australian firm which is publicly-listed on the ASX. The company has a...

70.2K

Verified Solution

Question

Finance

Cloudstreet Ltd is an Australian firm which is publicly-listedon the ASX. The company has a long term target capital structure of60% Ordinary Equity, 10% Preference Shares, and 30% Debt. All ofthe shareholders of Cloudstreet are Australian residents for taxpurposes. To fund a major expansion Cloudstreet Ltd needs to raisea $120 million in capital from debt and equity markets.
Cloudstreet Ltd’s broker advises that they can sell newcorporate bonds to investors for $1030 with a coupon of 6% and aface value of $1,000. Issue costs on this new debt is expected tobe 1.5% of face value. The bonds will mature in six (6) years. Thefirm can also issue new $100 preference shares which will pay adividend of $8 and have issue costs of 5%. The company also plansto issue new Ordinary Shares at an issue cost of 3%. The ordinaryshares of Cloudstreet are currently trading at $7.50 per share andwill pay a dividend of $0.40 this year. Ordinary dividends inCloudstreet are predicted to grow at a constant rate of 4% pa.
a.         (i)        Calculate how much debtCloudstreet will need to issue to maintain their target capitalstructure.
           (ii).       What will be theappropriate cost of debt for Cloudstreet?
b.         (i)        Calculate how muchPreference Share equity Cloudstreet will need to issue to maintaintheir target capital structure.
           (ii).       What will be theappropriate cost of Preference shares for Cloudstreet?
c.         (i)        Calculate how muchOrdinary Share equity Cloudstreet will need to issue to maintaintheir target capital structure.
           (ii).       What will be theappropriate cost of Ordinary Equity shares for Cloudstreet?
d.         Calculate theWeighted Average Cost of Capital for Cloudstreet following the newcapital raising.
e.         CloudstreetLtd has a current EBIT of $1.5 million per annum. The CFOapproaches the Board and advises them that they have devised astrategy which will lower the company’s cost of capital by a full1%. How will this change the value of the company? Support youranswer using theory and calculations.

Answer & Explanation Solved by verified expert

4.2 Ratings (759 Votes)

a i Target Capital Structure 60 Ordinary Equity 10 Preference Shares 30 Debt Target Capital 120 million Required Debt Level 120 x 03 36 million ii Bond Market Price 1030 Coupon 6 Face Value 1000 Issue Cost 15 of Fce Value 015 x 1000 150 Total Value to be Recovered through issue 1030 150 See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Cloudstreet Ltd is an Australian firm which is publicly-listedon the ASX. The company has a long term target capital structure of60% Ordinary Equity, 10% Preference Shares, and 30% Debt. All ofthe shareholders of Cloudstreet are Australian residents for taxpurposes. To fund a major expansion Cloudstreet Ltd needs to raisea $120 million in capital from debt and equity markets.Cloudstreet Ltd’s broker advises that they can sell newcorporate bonds to investors for $1030 with a coupon of 6% and aface value of $1,000. Issue costs on this new debt is expected tobe 1.5% of face value. The bonds will mature in six (6) years. Thefirm can also issue new $100 preference shares which will pay adividend of $8 and have issue costs of 5%. The company also plansto issue new Ordinary Shares at an issue cost of 3%. The ordinaryshares of Cloudstreet are currently trading at $7.50 per share andwill pay a dividend of $0.40 this year. Ordinary dividends inCloudstreet are predicted to grow at a constant rate of 4% pa.a. (i) Calculate how much debtCloudstreet will need to issue to maintain their target capitalstructure. (ii). What will be theappropriate cost of debt for Cloudstreet?b. (i) Calculate how muchPreference Share equity Cloudstreet will need to issue to maintaintheir target capital structure. (ii). What will be theappropriate cost of Preference shares for Cloudstreet? c. (i) Calculate how muchOrdinary Share equity Cloudstreet will need to issue to maintaintheir target capital structure. (ii). What will be theappropriate cost of Ordinary Equity shares for Cloudstreet?d. Calculate theWeighted Average Cost of Capital for Cloudstreet following the newcapital raising. e. CloudstreetLtd has a current EBIT of $1.5 million per annum. The CFOapproaches the Board and advises them that they have devised astrategy which will lower the company’s cost of capital by a full1%. How will this change the value of the company? Support youranswer using theory and calculations.