Question
QUESTION 3 (a) A company finances its operations with 40 percent debt and 60 percent equity. The annual yield on the companys debt is rd
QUESTION 3 (a) A company finances its operations with 40 percent debt and 60 percent equity. The annual yield on the companys debt is rd = 10% and the companys tax rate is T = 30%. The companys common stock trades at Po = K55 per share, and its current dividend of Do =K5 per share is expected to grow at a constant rate of g = 10% a year. The flotation cost of external equity, if it is issued, is F = 5% of the kwacha amount issued. What is the companys WACC? (6 marks) (b) XYZ Ltd has equity with a market value of K20 million and debt with a market value of K10 million. Treasury bills that mature in one year yield 8% per year (this is also XYZs cost of debt) and the expected return on the market portfolio over the next year is 18%. The beta of XYZs equity is .90. The firm is in the 30 percent tax bracket. What is XYZs weighted average cost of capital? (6 marks) ` (Total: 12 marks
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