You are Required to; i. Compute the component cost of: ordinary share capital, debt capital, preference share capital ii. Compute the company’s current weighted average cost of...

      

Thika ltd wishes to raise funds amounting to s. 10million to finance a project in the following
manner:
Sh. 6million from debt;
Sh. 4 million from floating new ordinary shares
The present capital structure of the company is made up as follows:
1. 600,000 fully paid ordinary shares of sh. 10 each
2. retained earnings of sh. 4 million
3. 200,000, 10% preferences shares of sh. 20 each
4. 40,000 6 % long term debenture of sh. 150 each
The current market value of the company’s ordinary shares is sh. 60 per share. The expected
ordinary share dividend in a year’s is sh. 2.40 per share. The average growth rate in both
dividends and earnings has been 10% over the past ten years and this growth rate is expected to
be maintained in the foreseeable future.
The company’s long term debentures currently change hands for sh. 100 each. The debentures
currently change for sh. 100 each. The debentures will mature in 100 years. The preference
shares were issued four years ago and still change hands at face value.

You are Required to;
i. Compute the component cost of: ordinary share capital, debt capital, preference share capital
ii. Compute the company’s current weighted average cost of capital
iii. Compute the company’s marginal cost of capital if it raised the additional sh. 10 million as
envisaged (assume a tax rate of 30%)

  

Answers

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NatalieR answered the question on February 9, 2022 at 13:14

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