Question Kingsford plc possess earnings before interest and tax (EBIT) per year of 30 million. These earnings are predicted to be the same. The market price of the firm's ordinary equity is 1.72 per share cum dividend and the market price of debentures is 70 per debenture ex-interest. An interim dividend of 12 pence per share was announced. Corporate tax rate is 30% and all earnings are paid as dividends. Kingsford's long-term capital structure is as follows: 000 25,000 Common equity (50 pence nominal value) Reserves 48,600 73,600 47,394 32% debentures 31 December 2017 (100 nominal value) 120,994 Required: Calculate the cost of capital of Kingsford plc based upon the Traditional Theory of Capital Structure. Assume it is 31 December 2014 now. (12 marks) (b) Dover plc is a firm financed fully with equity. It's market capitalisation is 65 million and possess a cost of capital of 36% per annum. The firm intend to buy back 10 million of shares and replace it with 26% irredeemable loan stock Dover's EBIT is predicted to be the same for the future. Corporate tax rate is 30%. All profits are used to pay dividends. Required: Based upon Modigliani and Miller (MM) assumptions, explain and demonstrate how this capital structure change will influence Dover's : Market value (3 marks) Cost of equity (7 marks) Cost of capital (3 marks) [Total : 25 marks] 18 END OF QUESTION PAPER