Compute the component costs

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Alpha Ltd wishes to know its overall cost of capital and the management has come to you for assistance on how to compute the component costs. Advice

i) The company has an issue of preferred stock with a sh. 5 stated dividend that just sold for sh. 87 per share.

ii)The company has just issued a dividend sh. 2.60 per share on its common stock. The company is expected to maintain a constant 6% growth rate in its dividends indefinitely. If the stock sells for sh. 60 a share, what is the cost of equity?

iii) The company has an outstanding debt of sh. 10M with a par value of sh. 100 per bond. The issue makes annual interest payments of 15%. Assuming a tax rate of 40%, determine the cost of debt.

iv) If the company maintains a capital structure of 60%, 30% and 10% respectively for equity, debt and preferred stock, compute the weighted average cost of capital.

Reference no: EM133114871

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