stion 2 River Co. is considering becoming active in the mergers and acquisitions field and wishes to calculate its current cost of capital for use as a discount rate in any future acquisition activity. The following financial information relates to River Co. Financial position statement extracts as at 31 October 2019 $000 Equity: Ordinary shares (nominal value 50cents) Reserves $000 6,000 16,000 22,000 Long term liabilities: 3% Preference shares (nominal value $100) 4% Bonds Redeemable after 5 years 4,000 6,000 10,000 32,000 The ordinary shares of River Co have an ex-dividend value of $4.56 per share and a dividend of 34.8c per share has just been paid. Dividends are expected to grow at 5% per annum. The preference shares are not redeemable and have a current market price of $95 per $100 nominal value. The redeemable bonds are repaid at their nominal value of 100 but have a current price of $104 per bond. Corporation tax is 20%. Required: (a) Calculate the market value weighted average cost of capital of River Co. [20 marks] (b) Critically appraise the traditional theory of gearing and Modigliani and Miller theory on the effects of gearing on a company's cost of capital. [15 marks]