During the last few years, Adamjee textile Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Mr. Sagheer Ahmed, the financial vice president. Your first task is to estimate Adamjees cost of capital. Sagheer has provided you with the following data, which he believes may be relevant to your task: (1) The firms tax rate is 38.5%. (2) The before tax cost of debt is 12% (3) The current price of the firms 7%, Rs. 100 par value, quarterly dividend, perpetual preferred stock is Rs.106.95. (4) Adamjees common stock is currently selling at Rs.94.21 per share. Its last dividend was Rs. 3 per share, and dividends are expected to grow at a constant rate of 7.8% in the foreseeable future. Adamjees beta is 1.6, the yield on T-bonds is 6.6%, and the market risk premium is estimated to be 8%. (5) Adamjees target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity. To help you structure the task, Sagheer has asked you to answer the following questions. a. What sources of capital should be included when you estimate Adamjees weighted average cost of capital? (1) What is the firms cost of preferred stock? (2) Why is there a cost associated with reinvested earnings? (3) Adamjee doesnt plan to issue new shares of common stock. Using the CAPM approach, what is Adamjees estimated cost of equity?

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(4) What is the estimated cost of equity using the dividend discount method approach? (5) What is your final estimate for the cost of equity, rs? (6) What is Harry Daviss weighted average cost of capital (WACC)?