Urgently Action Please:

Question: A company which pays tax at 10 per cent, has the following capital structure:

1. Ordinary shares: 1,000,000 ordinary shares of nominal value 25p per share. The market value of the shares is 49p per share. A dividend of 7p per share has just been paid, and dividends are expected to grow by 8% per year for the foreseeable future.

2. Preference shares: 250,000 preference shares of nominal value 50p per share. The market value of the shares is 32p per share and the annual net dividend of 7.5% has just been paid.

3. Bonds: 100,000 of irredeemable bonds with a market price of 92 per bond. These bonds have an interest rate of 10% and the annual interest payment has just been made.

Required: a. Calculate the weighted average after-tax cost of capital.

b. Critically evaluate and discuss the factors that should be considered by the directors of a company when choosing whether to use debt or equity finance for a new project.

c. Recently one director has attended a finance conference, on their return the director has decided the company should fund all projects with internal sources of financing as they are essentially free. Critically discuss if you agree with this statement.

d. Discuss whether the company should raise finance (via any means) if it has a project available with a net present value of 5million.