Question
The following figures have been extracted from the financial statements of LND Ltd: > Book Value of Current Assets $35 million and Current Liabilities $29.25
The following figures have been extracted from the financial statements of LND Ltd:
> Book Value of Current Assets $35 million and Current Liabilities $29.25 million
> Long-term Loan: $7.13 million
> Retained Earnings: $22.50 million
> 11% Debentures: $29 million debentures issued at $1,000.
> General Reserves $7.50 million
> Preference Share Capital: 8.5 million shares issued at $3 per share
> Ordinary Share Capital: 37 million shares issued at $1 per share
The following additional information has been provided by the manager of the company:
> Government bonds are currently yielding 5.9% per annum.
> The current market return on equity is estimated to be 14.4% per annum.
> A merchant banker suggests that LND Ltd would have to offer a rate of 12.8% p.a. on any new issue of 16-year debentures.
> Debenture coupons are paid semi-annually, with 16 years to maturity.
> The company tax rate is 32%.
> Preference shares of LND Ltd are currently traded at $1.79 per share
> LND Ltd ordinary shares have recently traded at $4.07 and the company's financial manager believes that a beta of 1.6 is appropriate for the company.
QUESTION: Using relevant information, estimate the weighted average cost of capital for LND Ltd.
Furthermore: Explain any four relevant factors that can affect the cost of capital.
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