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National Australia Bank is listed on the Australian Securities Exchange with code NAB. The company has 2.2731 billion shares outstanding and the closing price on 7 Sept 2012 was $25.06. It is expected to pay dividends of $1.80 per share this year (it has already paid $0.90 in the first half) and in this question you can assume this rate of dividend will continue for ever.
NAB has also issued a variety of debt instruments including some that are listed. One such listing is NABHA, a perpetual floating rate note that pays quarterly interest based on $100 face value. The latest interest rate effective from 15 May 2012 is 5.02% and you can assume in this question this rate stays constant for ever (although in practice a new rate is announced every three months for the following quarter). NABHA had a closing price of $68.00 per note on 7 Sept 2012.
The corporate tax rate in Australia is 30% but National Australia Bank organises its tax affairs well and it has reported its effective tax rate was 22.4% at September 2011.
(a) What is the cost of capital to National Australia Bank of its ordinary shares?
(b) What is the cost of capital to National Australia Bank of its NABHA floating rate notes?
(c) Imagine NABHA is National Australia Bank’s only source of debt funding and suppose there are 100 million of these notes outstanding (neither is true but this simplifies the calculations). In this case what would be the weighted average cost of capital?

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