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Calculate the cost of preference shares

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Question - Rambo Retailing Ltd is trying to determine its cost of capital.

The company just paid a dividend of $1.40 and expects to achieve a growth rate of 3% p.a. on their ordinary share dividends. The current market price of the share is $15, while they were originally issued at a price of $12. The standard deviation of the stock is 6% and the  is 0.7. The risk free rate is 4%.

The company has also issued bonds with a maturity of 20 years that pay annual coupons. The coupon rate is 8% and the bonds were issued with a face value of $1000 and have a current market price at $1000. There are presently 20,000 bonds on issue.

Preference shares have a market price of $90 and pay an annual dividend of 10%. The issue price of the preference shares was $100.

The debt to equity ratio of the company is 0.6. Of the equity, 65% is ordinary equity and 35% is preference equity.

The company tax rate is 30%.

Required - Calculate the cost of preference shares?

Reference no: EM133168060

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