QUESTION THREE

1. Identify and discus five factors that determine the value of a financial option
2. Njoro & Company has one million shares trading at the exchange at a market value of Ksh. 20 per share, and Kshs. 15 million in book value of outstanding debt (with an estimated market value of 2 million). The equity has a book value of 5 million and the recent financial year and paid 30 percent as taxes.

The fifteen year government bond rate is 10 percent. The average rate of return on the NSE- 20 share index is estimated at 15 percent.

Required

1. Compute the cost of equity (5 marks)
2. Compute the after tax cost of debt ( 5 marks)
3. Compute the cost of capital (5 marks)