QUESTION 10

a) Rock Ltd. is planning to issue 10 million $.0.25 shares with a current market price of $. 1.55 cum-dividend. An annual dividend of $0.09 has been proposed. The company earns an accounting rate of return on equity (R.O.E) of 10% and a dividend payout of 40%. The company also has 13%. $. 100 redeemable debentures with a nominal value of $.7 million, trading at $. 105. The debentures are due to be redeemed at par in five years' time.

Assume a corporation tax rate of 30%.

Required:

The weighted average cost of capital (WACC) of the company.

b) Chairimani Ltd. is contemplating to issue 8% bonds redeemable at $.100 par value in three years' time. Alternatively, each bond may be converted on that date into 30 ordinary shares of the company. The current market price per share is $.3.30 and this is expected to grow at 5% per annum into perpetuity. The company's cost of debt is 6% per annum.

Required:

(i) Market value of the bond.

(ii) Floor value of the bond.

(iii) Conversion premium per share.