Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Brozierz Ltd, operate in the engineering industry. They feel that some of their older equipment need to be replace. They seek your help to calculate

Brozierz Ltd, operate in the engineering industry. They feel that some of their older equipment need to be replace. They seek your help to calculate their cost of capital. Their present capital structure is as follows:

  • 300,000 $2 ordinary shares now trading at $2.40 per share.
  • 100,000 preference shares trading at $2.50 per share (issued at $3 per share).

10% p.a. fixed rate of interest.

  • A bank loan of $500,000 at 12% p.a. (payable in 5 years' life time).

Additional information:

  1. The company's beta is 1,4. A return on market of 15% and a risk free rate of 6%.
  2. Its current tax rate is 28%.
  3. Its current dividend is $0.50 per share and they expect their dividends to grow by 7% p.a.
    1. Assuming that the company uses the Capital Asset Pricing Model (CAPM) to calculate their cost of equity, calculate their weighted average cost of capital.

Required:

  1. A further $750,000 is needed to finance the expansion. Which option should they use (from ordinary shares, preference shares or loan financing) and why?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Horngrens Financial & Managerial Accounting The Financial Chapters

Authors: Tracie L. Miller Nobles, Brenda L. Mattison, Ella Mae Matsumura

4th Edition

0133255573, 978-0133255577

More Books

Students also viewed these Accounting questions

Question

What are the two classes of mass (gravity) movements?

Answered: 1 week ago

Question

2. I try to be as logical as possible

Answered: 1 week ago