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BJ Ltd is a manufacturing company based in Kafue with over 2 0 0 0 employees. The company has in issue 1 0 % bonds

BJ Ltd is a manufacturing company based in Kafue with over 2000 employees. The company has
in issue 10% bonds with a par value of K150,000. The interest on the bonds is payable semiannually. The pre-tax cost of the debentures is 15.4% per annum. The bonds are redeemable for
K180,000 after ten years. The management of BJ Ltd are confident that the company will have
enough cash to redeem the bonds.
The shares in BJ Ltd have a beta of 1.2. The risk premium is 5% and the risk free rate of return
is 3%. BJ Ltd has 200,000 ordinary shares in issue with a market price of K10 each. The profit
after tax was K500,000 for the most recent financial year. BJ Ltd has a dividend cover of 2.5
times and an average dividend growth rate of 5% per annum. BJ Ltd pay corporate tax at the
rate of 35% per annum.
Required;
(a) Calculate the following for BJ Ltd:
(i) Market value of the debentures.
(ii) The cost of equity using the capital asset pricing model.
(iii) The cost of equity using the dividend valuation model.
(iv)The Weighted average cost of capital using the cost of equity calculated in part (iii)
above.
(15 marks)
(b) Discuss the factors that could influence the choice of debt financing for BJ Ltd Plc

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