Question
Quest Exploration Ltd is attempting to take advantage of the commodity boom by increasing its exploration activities. However, as a junior mining company, it must
Quest Exploration Ltd is attempting to take advantage of the commodity boom by increasing its exploration activities. However, as a junior mining company, it must raise additional capital for further capital investment. The tax rate of the company is 30%. You are asked to prepare the following information and financial data.
Debt: Quest Exploration can raise debt by selling $1,000 par (face) value, 6.5% coupon interest paid semi-annually, 10-year bonds. In order to sell the issue, an average discount of $20 per bond needs to be offered.
Preference shares: A number of preference shares can be sold under the following terms: the shares have a face value of $100 per share, and the annual dividend rate is 6% of the face value. The preference shares are expected to sell for $102.
Ordinary shares: The current price of Quest Explorations ordinary shares is $35 per share. A cash dividend of $3.00 per share was recently paid. The firms dividends have grown at an annual rate of 5% and are expected to grow at this rate in the foreseeable future.
The company is expected to raise $10 million to finance the expansion in which it will sell 4,000 bonds, $1 million from preference shares and the remaining from ordinary shares.
- Calculate the weights of each source of capital after the fundraising
- Calculate the cost of each source of capital
- Calculate the weighted average cost of capital in the Quest Exploration new project
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started