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a) The following is the existing capital structure of Company XYZ Ltd. Ordinary shares at Shs.10 par 1,000,000 Retained 800,000 12% preference shares Shs.10 par

a) The following is the existing capital structure of Company XYZ Ltd.

Ordinary shares at Shs.10 par 1,000,000

Retained 800,000

12% preference shares Shs.10 par 400,000

16% Debentures Shs.100 par 300,000

Total capital employed 2,500,000

1. The company's ordinary shares have a dividend payout ratio of 33.3% and a return on its ordinary shares of 16.7%

2. Ordinary shares sells at Shs.18

3. Preference shares sell at Shs.15

4. Debentures are selling at par.

5. The tax rate is 30%

Required

a) Compute the Growth in Equity &W.A.C.C at book values & market values

b) With Examples how can you Explain the Capital structure and financial structure of the business?

c) What is the effect of introduction of debt capital on weighted average cost of Capital? Demonstrate by using the Traditional theory of capital structure

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