Question
YT Investments Ltd. wishes to raise funds amounting to Sh.15 million to finance a project in the following manner: Sh.10 million from debt; and Sh.5
YT Investments Ltd. wishes to raise funds amounting to Sh.15 million to finance a project in the following manner:
Sh.10 million from debt; and
Sh.5 million from floating new ordinary shares.
The present capital structure of the company is made up as follows:
1.600,000 fully paid ordinary shares of Sh.10 each
2.Retained earnings of Sh.6 million
3.200,000, 10% preference shares of Sh.20 each.
4.40,000 6% long-term debentures of Sh.120 each.
The current market value of the company's ordinary shares is Sh.50 per share.The expected ordinary share dividends in a year's time is Sh.2.00 per share.The average growth rate in both dividends and earnings has been 10% over the past ten years and this growth rate is expected to be maintained in the foreseeable future.
The company's long-term debentures currently change hands for Sh.100 each.The preference shares were issued four years ago and still change hands at face value.
Required:
(i)Compute the component cost of:
-Debt capital;
-Ordinary share capital
-Preference share capital.
(ii)Compute the company's current weighted average cost of capital.
(iii)Compute the company's marginal cost of capital if it raised the additional Sh.15million as envisaged.(Assume a tax rate of 30%).
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