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 K$150,000.$ The interest on the bonds is payable semiannually. The pre$-$tax cost of the debentures is $15\mathrm{.}4\%$ per annum. The bonds are redeemable for

K$180,000$ 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 $1\mathrm{.}2.$ 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 K$10$ each. The profit

after tax was K$500,000$ for the most recent financial year. BJ Ltd has a dividend cover of $2\mathrm{.}5$

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