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MTR Pharma Tech's bonds will mature in four years with a total face value of $60 million

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MTR Pharma Tech's bonds will mature in four years with a total face value of $60 million, paying a half yearly coupon rate of 12% per annum. The yield on the bonds is 14% per annum. The market value for the companyâs preference share is $7.50 per unit while the ordinary share is currently worth $2.00 per unit. The preference share pays a dividend of $1.00 per share. The beta coefficient for the ordinary share is 1.5. The market risk premium is estimated to be 11% per annum and the risk-free rate is 4% per annum. The company is subject to a 30% corporate tax rate. Below is the recent balance sheet for the company:

 

                                            $ (Million)

 

Debt:

 

       Bonds                                   $60

 

Equity:

 

       Preference shares (100,000 units)        $3

 

       Ordinary shares (10 million units)       $15

 

 

a. Calculate the after-tax cost of each of the companyâs current financing sources as below:

 

    Bonds

    Preference shares

    Ordinary shares

 

b. Using the information provided, calculate the market values for the financing sources listed below:

 

    Bonds

    Preference shares

    Ordinary shares

 

c. Using the information from the previous sections, calculate the companyâs after-tax weighted average cost of capital (WACC). The finance manager has identified a potential project with an IRR of 20% per year. Should this project be undertaken by the company? Discuss your recommendation and support with relevant calculations.

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[Solved] MTR Pharma Tech's bonds will mature in four years with a total face value of $60 million

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  • Submitted On 10 May, 2017 06:36:38
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