Reference no: EM132908065

Big Tour Ltd is a company that arranges group tours to a variety of seaside resorts. The company is publicly listed and it currently has 50 million ordinary shares on issue. The beta of its share is 1.2. Government bonds are currently trading at 6% per annum and the return on the market is 12% per annum. The firm has just paid a dividend of $0.40. Since the company is well established in its industry, its dividends are only expected to grow at 3% forever.

• Eight years ago, Big Tours took out a long-term loan with its bank for a mortgage of Big Tour's office buildings. The loan was 20 years. The cost of this loan is 6% per annum, compounding monthly and the company makes monthly repayments of $45,000.
• Big Tour also has a loan with its bank which was taken out to cover some cash flow issues. The loan was for a year. The cost of the loan was 6.5% per annum, compounding monthly and the company makes monthly repayments of $ 3200 per month.
• Big Tour has 100 debentures with a face value of $100,000 and 8 years to maturity. The debentures pay two coupons annually at a rate of 7%. Similar debentures trade with a yield to maturity of 8%.

Problem (a) Calculate the cost of equity for ordinary shares and the value of ordinary shares.

Problem (b) Calculate the cost of debt and the debt value.

Problem (c) For the 100 debentures in the firm, are they currently traded at premium or at discount? Explain.

Problem (d) Calculate the weighted average cost of capital for the firm.

Problem (e) When would you use the WACC of this firm for project evaluation