Task: Part B Cost of Capital (Show all workings 50 marks) Grainwaves Ltd is an Australian firm which

Task:

Part B Cost of Capital (Show all workings 50 marks) Grainwaves Ltd is an Australian firm which is publicly-listed on the ASX. The company has a long term target capital structure of 55 % Ordinary Equity, 59% Preference Shares, and 40 % Debt. All of the shareholders of Grainwaves are Australian residents for tax purposes. To fund a major expansion Grainwaves Ltd needs to raise a $150 million in capital from debt and equity markets Grainwaves Ltd's broker advises that they can sell new 10 year corporate bonds to investors for $105 with an annual coupon of 6% and a face value of $100. Issue costs on this new debt is expected to be 1% of face value. The firm can also issue new $100 preference shares which will pay a dividend of $7.50 and have issue costs of 2%6. The company also plans to issue new Ordinary Shares at an issue cost of 2.5%. The ordinary shares of Grainwaves are currently trading at $4.50 per share and will pay a dividend of $0.15 this year. Ordinary dividends in Grainwaves are predicted to grow at a constant rate of 79% pa. vii. Grainwaves Ltd has a current EBIT of $1.3 million per annum. The CFO approaches the Board and advises them that they have devised a strategy which will lower the company's cost of capital by 0.59%. How will this change the value of the company? Support your answer using theory and calculations. (10 marks)