Question
As a financial analyst for the JA60 Ltd, you have been given the assignment of determining the companys cost of capital. Toward that end, the
As a financial analyst for the JA60 Ltd, you have been given the assignment of determining the companys cost of capital. Toward that end, the following information has been collected: Present Capital Structure Source of Capital Par/Maturity Value Total Book Value Market Value Debt (8%, 15 year) $1,000 $8,000,000 $1,200 per bond Preferred stock (8%) $100 $2,000,000 $120 per share Common stock $10 $10,000,000 $20 per share . The companys last common dividend was $0.97. The year before that, a dividend of $0.91 was paid. The growth rate for dividends is expected to be constant for the foreseeable future. The companys tax rate is 35%.
a. The directors of JN60 have been told that they can reduce the overall cost of capital by issuing more long-term debt. Write a memo (in good form) outlining the extent to which increasing the gearing of the company could have the desired effect. [10 marks]
Note: State all formulas. All currency and percentage symbols should be shown. Show answers to 2dp. Marks will be awarded for expression. Responses to part (b) should show a similarity index of no more than 10%.
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