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Star Ltd has come to you for advice on the following issues related to cost of capital. Advice.
a) The preferred stock of the company has a par value of sh. 8. The dividend to the shareholders is at the rate of 15% and the stock is currently selling at par. What is the cost of preferred stock?
b) The company has just issued a dividend of sh. 6 per share on its common stock. The company is expected to maintain a constant 12% growth rate in its dividends indefinitely. If the stock sells for sh. 30 per share, what is the cost of equity?
c) The company has an outstanding debt of sh. 50M with a par value of sh. 1000 per bond. The annual interest payments are 15%. Assuming a tax rate of 30%, determine the cost of debt.
d) The current capital structure is 50%, 30% and 20% respectively for equity, debt and preferred stock. Compute the weighted average cost of capital.
Using TVM techniques, calculate the amount of savings you will need to comfortably retire if you are age 35 and planning to retire at age 70.
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Increasing financial leverage can increase both the cost of debt and the cost of equity. How can the overall cost of capital stay constant?
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