Question One

The capital structure of a company is made up of the following:

$-$ Ordinary shares of sh$\mathrm{.}50$ each sh$\mathrm{.}250,000,000$

$-$ Retained Earnings sh$.70,000,000$

$-15\%$ Preference shares of sh$\mathrm{.}25$ each sh$.160,000,000$

$-10\%$ Debentures of sh$\mathrm{.}100$ each sh$.100,000,000$

Additional information:

$1.$ The tax rate of the company is at $30\%.$

$2.$ The debentures are going for sh$.120$ each in the market with maturity of $12$ years.

$3.$ The company will issue an ordinary dividend of sh$.4$ which has growing at the rate of $6\%.$

$4.$ The market price of Ordinary shares is sh$\mathrm{.}160$ per share.

$5.$ Preference shares are selling at sh$\mathrm{.}45$ per share

Required:

a$)$ The weighted average cost of capital on both book values and market values $(20$ marks$)$

b$)$ Explain in brief how CAPM deals with investment risks $(5$marks$)$