Reference no: EM133024871

QUESTION - Marx Ltd is interested in measuring its overall cost of capital. The cost of capital will be used to evaluate potential investment projects. The company's bookkeeper has gathered the following data: Ordinary shares (55%): Marx Ltd reported retained earnings of R3 800 000,00 in the previous year. The company paid a dividend of R2,35 on each of its 900 000 ordinary shares issued. The market price of the ordinary shares is R55 and the dividends are expected to grow at a rate of 8% per year for the foreseeable future. Under-pricing and flotation costs amount to R12,00 when the company issues new shares. Preference shares (15%): The company can issue R3,00 dividends, and preference shares at a market price of R23,00 per share. The flotation costs would amount to R1,50 per share. Long-term debt (30%): R1 000,00 par value, 10% coupon and five-year bonds that could be sold for R1 200,00, will be issued with a flotation costs of R25,00 per bond. The company falls in the 28% tax bracket.

REQUIRED -

1. Calculate the cost of retained earnings, new ordinary shares, preference shares and long- term debt of Marx Ltd and indicate the maximum investment that Marx Ltd can make with the new project before it must issue new ordinary shares (break point of ordinary shares)

2. Calculate the weighted average cost of capital (WACC) below or at the break point of ordinary shares.

3. Calculate the weighted average cost of capital (WACC) above the break point of ordinary shares.