QUESTION TWO

The following is the existing capital structure of Company XYZ Ltd.

Ordinary shares at Shs.10 par

Retained

12% preference shares Shs.10 par

16% loan Shs.100 par

Total capital employed

Shs.

1,000,000

800,000

400,000

300,000

2,500,000

The company's ordinary shares have a dividend cover of 3 times and pays a dividend of 10% on its ordinary share capital.

Ordinary shares sells at Shs.18

Preference shares sell at Shs.15

Debentures are selling at par.The tax rate is 30%

Compute

a) Growth in Equity. (12 marks)

b) Weighted Average Cost of Capital (13 marks)