QuestionS (a) (b) Why estimating cost of capital is important in business finance? (2 Marks) What is meant by marginal cost of capital? Explain briefly how marginal cost of capital can be used for log-term investment decisions. (3 Marks) Outline the capital expenditure process and explain it briefly (4 Marks) Sagara shipping company Ltd. is exploring expansion possibilities for 2017 and beyond by buying more ships. A suitable ship would cost Rs.6 million and has expected life 4 years. A ship can be depreciated Rs.1.5 million per annum over 4 years. The ship would result in an increase in sale of Rs.3 million per year. A new ship captain would cost Rs.90,000 per annum and running cost would be Rs.500,000 per annum. Calculate the following assuming that a company tax rate is 30%. 1) Internal rate of return on the investment (c) (d) The NPV if the required rate of return is 12% (5 Marks) (e) Mrs. Fernando is the finance manager of a listed company and company is currently paying tax at 30%. She is preparing his recommendations for the company's capital budget and needs to estimate the company's weighted cost of capital. The market value of the company's current capital structure consists of Rs. 3 million in bonds, Rs. 2 million in preference shares and Rs. 5 million in Ordinary equity Maturing in 10 years, each bond has a Rs.1000 par value and a coupon of 12%. The current market price (after issue cost) of a bond is Rs. 1060. Currently selling for Rs.12, the company's preference share pays a dividend rate of 10% on a par, Rs. 10. If new shares are issued, the company would receive net proceeds of Rs. 11.50 per share. The company's ordinary share recently paid a Rs. I dividend. Dividend per share has grown at a rate of 10% per year and this growth rate is expected to continue into the foresecable future. The company maintains a constant dividend/earnings ratio of 60%. The price of this share is now Rs. 4.00, but 596 issue costs are anticipated. Calculate the weighted average cost of capital of the Company. (6 Marks)