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Somaco Ltd is planning to build a business commercial complex along Entebbe Highway. The project will cost USD 180 million. Somaco's current capital structure which is considered optimal is as follows:
USD '000'
Debt - 384,000
Ordinary shares (par value USD 10) - 480,000
Retained Profits - 96,000
Total - 960,000
The following information is also available:
Required:
Question i. Determine how much of the USD 180 million is to be raised by equity capital if the capital structure is to remain unchanged.
Question ii. Determine how much of the capital must come from retained earnings.
Question iii. Determine how many new ordinary shares have to be floated to raise the required portion of equity capital.
Question iv. Calculate the investment's marginal cost of capital.
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