Reference no: EM132504594

Somaco Ltd is planning to build a business commercial complex along Entebbe Highway. The project will cost Shs 180 million. Somaco's current capital structure which is considered optimal is as follows:

Shs '000'

Debt                                              384,000

Ordinary shares (par value Shs 10)            480,000

Retained Profits                                    96,000

                                                            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 Shs 30 per share with a dividend of Shs 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 Shs 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