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QUESTION FIVE the weighted average cost of capital ZiZig Company Limited (ZCL) is a listed company involved in ag volved in agriculture. Its current land
QUESTION FIVE the weighted average cost of capital ZiZig Company Limited (ZCL) is a listed company involved in ag volved in agriculture. Its current land and processing plant are too small to meet the gr og plant are too small to meet the growing demand that it anticipates to Once it gets a permit for the construction of a new dam. It therefore seeks to expand its operations and is wary of a discou decision making. To estimate this rate, they operations and is wary of a discount rate it can use as a hurdle rate in its aningTo estimate this rate they have been advised to consider estimating ed average cost of capital as a basis for identifying this hurdle rate. The Formation is available. The current capital structure is shown below: Debt. 9% COUD CDL 5% coupon, K1.000 par k 20,000,000 Preferred stock, 8% dividend K50 K 10,000,000 common stock. K1 par K2,000,000 Retained earnings K68,000,000 TOTAL K100,000,000 New K1,000 par bonds can be sold at par with a 10% coupon. New K25 par Preferred stock may be sold at par with a k2.50 dividend per share. Dividends on the common stock have grown at a rate of 8% which is expected to continue. Next year's dividend is expected to be K2.00 per share and the company's common stock whose beta coefficient is 1.5. currently sells over-the-counter at K20.00 per share. The risk free rate is 6% and the return on the market portfolio is 15%. The company is in the 35% tax bracket Required: (0) Calculate the cost of debt for ZCL. (3 marks) (ii) Calculate the company's cost of preferred stock. (3 marks) (iii) Calculate the cost of equity using both the dividend growth model and the security market line. (8 marks) (iv) What is the firm's weighted average cost of capital? (4 marks) (v) Explain why many companies use their weighted average cost of capital (WACC) to evaluate capital investments, and what particular assumptions they make in using WACC for this purpose. (7 marks) Total (25 marks)
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