ABC ltd has the following capital structure Equity: P10,400,000 20thebe ordinary shares with a market price of P5.20 Reserves: P2,200,000 Preference shares: P1,050,000 8% P1 preference shares with a market price of 70thebe Loan stock: P800,000 6% debentures with a market price of par (i.e. P80 per P100 nominal value of stock) The ordinary shares dividend recently paid was 50thebe per share. Dividends are expected to grow at 5% per annum for the foreseeable future. The preference shares and loan stock can be assumed to be irredeemable. ABC ltds marginal rate of corporation tax is 30%. Note: 100 thebe = P1 Required: a. Using market values, calculate the following: i. Cost of equity. (3 marks) ii. Cost of preference shares. (3 marks) iii. Cost of loan stock (3 marks) b. Based on the above calculations determine ABC ltds weighted average cost of capital. (10 marks) c. Identify and explain three factors that could influence the cost of the above sources of finance. (6 marks) QUESTION 3 [25 MARKS] A company is considering investing in either Project A or Project B. Relevant financial information is as follows: Project A Project B P P Initial capital cost of equipment Estimated Profits: 100,000 100,000 Year 1 25,000 10,000 Year 2 20,000 36,000 Year 3 14,000 40,000 Year 4 40,000 42,000 Life of project 4 years 4 years Anticipated re-sale value of equipment at the end of Year 4 10,000 nil The companys cost of capital is 8% and the applicable discount rates are as follows: Year 1 0.926 Year 2 0.857 Year 3 0.794 Year 4 0.735 Required: a. Calculate, in years and months, the simple payback period for each project. Assume that there are 12 months in a year, that each month has 30 days and that annual cash flows occur at an even rate throughout the year. (6 marks) b. Calculate, to the nearest P1, the net present value of each project. Assume that net cash inflows are received at the end of each year and the anticipated re-sale value of equipment is achieved. (8 marks) c. Identify five advantages of NPV as a capital budgeting technique. (5 marks) d. Explain three reasons why capital budgeting decisions are important. (6 marks)