Reference no: EM133045537
Question - YT Investments Ltd. wishes to raise funds amounting to Sh.15 million to finance a project in the following manner:
Sh.10 million from debt; and
Sh.5 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.6 million
3. 200,000, 10% preference shares of Sh.20 each.
4. 40,000 6% long-term debentures of Sh.120 each.
The current market value of the company's ordinary shares is Sh.50 per share. The expected ordinary share dividends in a year's time is Sh.2.00 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 preference shares were issued four years ago and still change hands at face value.
Required - (i) Compute the component cost of:
- Debt capital;
- Ordinary share 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.15million as envisaged. (Assume a tax rate of 30%).
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