Question
ABC Company considers the following Capital Structure for the coming financial year shillings 8% Coupon, sh. 1,000 Bonds 3,500,000 6%, sh. 100 Par Preferred Stock
ABC Company considers the following Capital Structure for the coming financial year shillings 8% Coupon, sh. 1,000 Bonds 3,500,000 6%, sh. 100 Par Preferred Stock 4,000,000 Common equity (10,000 shares) 2,000,000 Retained earnings 3,500,000 Additional Information: i) The firm is subject to corporation tax at a rate of 30%. ii) The current market value of bonds is sh. 1,150. iii) Outstanding preferred stocks are currently trading at sh. 95 and the firm plans to float new issues with similar characteristics. iv) The firm plans to float new common equity with similar features as the one currently outstanding. The outstanding common stock has a current market value of sh. 210 and it paid investors a dividend of sh. 3.50 last year. The growth rate for dividends is 6%. v) The firm expects to incur sh. 5.00 in floatation costs per preference share issue while new common equity will similarly cost 5% in floatation costs. Required: i. Compute the cost of debt (3 marks) ii. Cost of preferred Stock (3 marks) iii. Compute the cost of new common equity (4 marks) iv. Cost of retained earnings (3 marks) v. Compute the Weighted Average Cost of Capital (WACC) (5 marks)
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