Reference no: EM132506127

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:

1. New debt will be obtained from a commercial bank at an interest rate of 15%.
2. Ordinary shares-Current market price is USD 30 per share with a dividend of USD 5 per share and an expected growth rate of 5%. Floatation costs amount to 4%.
3. The marginal tax rate is 40%.

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.

Given the following data:- Risk free return on treasury bill is 5%; Market return is 10% and Beta (β) is 2 : Required: Calculate the cost of equity.