Question
The following figures have been extracted from the financial statements of MRT Ltd: > Book Value of Current Assets $35 million and Current Liabilities $29.25
The following figures have been extracted from the financial statements of MRT Ltd:
> Book Value of Current Assets $35 million and Current Liabilities $29.25 million
> Long-term Loan: $5.60 million
> Retained Earnings: $22.50 million
> 93% Debentures: $511 million debentures issued at $1,000.
> General Reserves $7.50 million
> Preference Share Capital: 1,881.0 million shares issued at $6 per share
> Ordinary Share Capital: 10 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 1,251.0% per annum.
> The current market return on equity is estimated to be 11.4% per annum.
> A merchant banker suggests that MRT Ltd would have to offer a rate of 9.1% p.a. on any new issue of 12-year debentures.
> Debenture coupons are paid semi-annually, with 12 years to maturity.
> The company tax rate is 13%.
> Preference shares of MRT Ltd are currently traded at $6.31 per share
> MRT Ltd ordinary shares have recently traded at $11.30 and the company's financial manager believes that a beta of 57.0 is appropriate for the company.
Requirement-A. Using relevant information, estimate the weighted average cost of capital for MRT Ltd. <4 marks>
Requirement-B. Using your own words, explain any four relevant factors that can affect the cost of capital. <2 marks>
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