You are an investment manager at Securities Investment PLC and you are advising the management...
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You are an investment manager at Securities Investment PLC and you are advising the management of Microprocessors Limited, a manufacturer of microchips, on its capital structure. The following information is available to you to assist your assessment. The firm: i. has issued 10% preferred share which sold for $100 per share par value. The cost of issuing and selling the stock was $2 per share. ii. has common share with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. Growth rate in dividends has been 5%. iii. can borrow funds by selling $1000 par value 10% coupon interest rate, 10-year debt. To sell securities, an average discount of $30 per bond is given. Assume that the tax rate is 35%. iv. has the following capital structure which it considers optimal: A. Determine the: i.beforeandafter-taxcostofdebt.ii.costofpreferredstock.iii.costofcommonstock.iv.weightedaveragecostofcapital.(4marks)(2marks)(2marks)(4marks) B. The firm has a beta of 1.4. The market return equals 12% and the risk-free rate of return is 7%. Determine the firm's cost of common equity using CAPM approach
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