Your client wishes you to investigate a telecommunicationscompany with the following balance sheet and details (below):Long-term debt $ Bonds: Par $1,000, annual coupon 7% p.a., 3 yearsto maturity 10,000,000 Equity Preference shares 5,000,000 Ordinaryshares 15,000,000 Total 30,000,000 Notes: The company’s bank hasadvised that the interest rate on any new debt finance provided forthe projects would be 6% p.a. if the debt issue is of similar riskand of the same time to maturity and coupon rate. There arecurrently 1,000,000 preference shares on issue, which pay adividend of $0.75 per share. The preference shares currently sellfor $5.89. The company’s existing 5,000,000 ordinary sharescurrently sell for $2.34 each. You have identified that the companyhas recently paid a $0.35 dividend. Historically, dividends haveincreased at an annual rate of 2% p.a. and are expected to continueto do so in the future. The company’s tax rate is 30%. Your clientwishes to understand, with the use of workings, the followingaspects of this company and states that their required rate ofreturn for investment in a company with similar characteristics tothis particular company would be 10% p.a. Advise the client onwhether you believe this to be a good or bad investment and therationale for investment (or not investing). a) Determine themarket value proportions of debt, preference shares and ordinaryequity comprising the company’s capital structure. b) Calculate theafter-tax costs of capital for each source of finance. c) Determinethe after-tax weighted average cost of capital for the company. d)Indicate, using all applicable information, whether you wouldrecommend this telecommunications company to your client (ornot).

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