Debt-preference shares and ordinary shares

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Quest Exploration Ltd is trying to take advantage of the commodity boom by increasing its exploration activities. However, as a junior mining company it will need to raise additional capital over the coming year. The tax rate of the company is 30%. As financial manager, you have prepared the following information and financial data.

Debt: Quest Exploration can raise an unlimited amount of debt by selling $1,000 par (face) value, 6.5% coupon interest 10-year bonds. In order to sell the issue, an average discount of $20 per bond needs to be given. Additionally, floatation costs of 2% of par value will be incurred.

Preference shares: An unlimited number of preference shares can be sold under the following terms: the shares have a face value of $100 per share, the annual dividend rate is 6% of the face value and the floatation cost is expected to be $4 per share. The preference shares are expected to sell for $102 before cost considerations.

Ordinary shares: The current price of Quest Exploration’s ordinary shares is $35 per share. A cash dividend of $3.00 per share was recently paid. The firm’s dividends have grown at an annual rate of 5% and are expected to grow at this rate in the foreseeable future. The floatation cost is expected to be approximately $2 per share.

Retained earnings: Quest Exploration expects to generate $100,000 of retained earnings in the coming year.


Calculate the specific cost of each source of financing. (Round your answer to the nearest 0.01%).

Reference no: EM13987840


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