Reference no: EM131966989

(i) Define and discuss the concept of capital structure

(ii) Discuss and distinguish between theories of dividend, dividend policy, and types of dividends.

(iii) As the newly employed Director of Finance of Azigizag International, you have gathered the following information about the capital structure of your company:

20% Bonds Payable (long bond due 2020)       $400,000

15% Regular Preference Shares (4,000 Shares issued, Par $100)        $ 400,000

12% Cumulative Preference Shares (3,000 shares issued, Par $100)       300,000

10% Participative Preference Shares (1,000 shares issued, Par $300)     300,000

Common Shares (60,000 issued and outstanding, Par $10)                    600,000

Retained Earnings 2,000,000

Total Shareholders’ Equity                                                               3,600,000

Total Long-Term Liabilities and Shareholders’ Equity                          4,000,000

NOTE: The Participative Preference Shares only share in any extra dividends after the Common Shares receive at least $700,000 in dividends. The participation in the extra dividends declared is in direct proportion to the relative total par value of the common shares and the participative preference shares issued and outstanding. Assume that the cost of newly issued common shares is estimated to be 13% and that of retained earnings is also estimated to be 11%. Income tax rate is projected to be 25%.

Requirements:( 1). Compute the weighted average cost of capital for the company. (2). Show, with computations, how a total dividend declared of $160,000 would be shared among the relevant shareholders. (3). Show, with computations, how a total dividend declared of $250,000 would be shared among the relevant shareholders (Assume the Cumulative Preference Shares are one year in arrears). (4). Show, with computations, how a total dividend declared of $1,210,000 would be shared among the relevant shareholders.