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A balance sheet of the company, total bonds is $3,000,000 (Par $1,000,annual coupon 8%p.a., 4 years to maturity); the equity include preference share $3,000,000 and ordinary shares is $6,000,000; so the total is 12,000,000. the company’s bank has advised the interest rate on any new debt finance provided for the projects is 9% p.a. and if the debt issue is of similar risk of same time to maturity and coupon rate. Now, it has 1,000,000 preference share on issue and pay dividend $0.25 per year. the preference shares sell $3.20. Company has 1,000,000 ordinary shares and sell for $3.25 each and expects to pay a dividend of $0.3 per share at the end of next year. Dividends have increase 4%p.a. at an annual rate and will continue in future. Tax rate is 30%.
Could you use dividend growth model to find company’s cost of equity? and also show the market value proportions of debt, preference shares and ordinary equity comprising the company’s capital structure?
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