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  1. business
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  3. dreams ltd is financed by both debt (bonds) and eq

Dreams Ltd is financed by both debt (bonds) and equity (shares). The debt-to-equity...

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Accounting

Dreams Ltd is financed by both debt (bonds) and equity (shares).
The debt-to-equity ratio is 0.94. Below you have the YTM and the
weight of all outstanding bonds of Dreams Ltd.
The return on risk-free government securities is 5 per cent and the
market risk premium is 6 per cent. Dreams Ltd.'s shares have a
beta value of 0.7. The corporate tax rate is 30 per cent.
(a) Compute the cost of debt with the information of firm's
outstanding bond.
(15 marks)
(b) Compute the cost of equity.
(15 marks)
(c) Compute the after-tax WACC (Weighted Average of Cost of
Capital).
(20 marks)
(d) Assuming that the market is efficient and there is no asymmetric
information, explain the relationship between the use of debt and
the value of firm. (Hints: Use Modigliani and Miller propositions.)
(50 marks)
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