QUESTION 2

Gidimadjor has the following capital structure GH 000 GH 000 Equity and reserves Ordinary shares 23,000 Reserves 247.000 270,000 Non-current liabilities 5% Preference shares 5,000 6% loan notes 11,000 Bank loan 3,000 19,000 289,000 The ordinary shares of Gidimadjor are currently trading at GH 4-26 per share on an ex dividend basis and have a nominal value of GH 0-25 per share. Ordinary dividends are expected to grow in the future by 4% per year and a dividend of GH 0-25 per share has just been paid. The 5% preference shares have an ex dividend market value of GH 0-56 per share and a nominal value of GH 1.00 per share. These shares are irredeemable. The 6% loan notes of Gidimajor are currently trading at GH 95-45 per loan note on an ex interest basis and will be redeemed at their nominal value of GH 100 per loan note in five years' time. The bank loan has a fixed interest rate of 7% per year. Gidimajor pays corporation tax at a rate of 25% Required: a. Calculate the after-tax weighted average cost of capital of Gidimadjor on a market value basis. (10 marks) b. Discuss the connection between the relative costs of sources of finance and the creditor hierarchy. (5 marks) (Total: 15 marks)