Use the following information about Extreme Ltd

Subject:FinancePrice:3.87 Bought7

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Use the following information about Extreme Ltd.’s capital structure to answer the questions below;   

Extreme’s capital structure is made up of:

	CAPITAL STRUCTURE
DEBT	Bonds
EQUITY	Preference Shares Ordinary Shares

• Extreme Ltd. has 120,000 bonds outstanding with a face value of $100 each. These bonds have 3 years to maturity and pay an annual coupon of 6%. Extreme’s statutory corporate tax rate is 30%.

Moody’s Corporation is one of a big ratings agency which has given Extreme Ltd. a debt rating of AAA. The following table shows the risk premium available in the market based on debt ratings:

Debt rating	Risk premium
AAA	5.0%
AA	6.5%
BBB	7.2%
BB	7.5%

• The risk free rate is 1%.
• Extreme Ltd. has issued 7 million preference shares, which pay an annual dividend per share of $0.25. They are currently trading at $2 each.  
• Extreme Ltd. has issued 10 million ordinary shares, which are currently trading at $4 each.  Shareholders are to receive a dividend of $0.60 per share in the current year, and this dividend is estimated to grow at a constant rate of 3% in perpetuity.

NOTE: Round all dollar amounts to the nearest dollar and all percentages to two decimal places.

1. What is Extreme's after?tax cost of debt?

2. What is the value of Extreme's bonds? 

3. What is the market value of Extreme's preference shares? 

4. What is Extreme's cost of preference shares? 

5. What is the market value of Extreme's ordinary shares?