Ocean Blue Vessels Ltd is a real Liner firm whose capital structure consists of debt, preference shares and equity shares. The company plans to raise further capital for its expansion plans. The company has issued 10 year, 45000, 10 % bonds five years back. The bond which was issued at a face value of Rs 100 is currently being sold at Rs 98.The company has issued 15,000 11% preference shares 3 years back with a redemption period of 10 years. The preference shares which have a face value of Rs100 are currently being sold at for Rs 102. The company is subject to a tax bracket of 25 %.
The company has also issued 70,000 equity shares of face value Rs 100 at the same time. The company prefers valuating its equity shares according to the Capital asset pricing mechanism. For evaluating the cost of equity the company finds it suitable to consider the market performance of past one year. The ocean blue's month end share price and the shipping index is as follows:
Month End Closing
The risk free rate is 8 % and the market rate of return in shipping sector is 12%.
Suggest the management regarding the present weighted average cost of capital.