Reference no: EM132582068
Cost of capital, raising capital and dividend policy
The Assistant Accountant has helped you obtain company records and you establish that it is funded as follows:
Type of Financing Market Value Beta
Long Term Debt $40 million 0.2
Ordinary Shares $20 million 0.5
Preference Shares $60 million 1.1
The risk-free rate is 3.72% and the market risk premium is 5.71%.
The Board of Directors have expressed that they require your guidance on the following matters:
- The company needs to raise a medium-size loan with long-term-to-maturity that has a low liquidity in the next financial year to fund capital projects. They are considering three types of possible financing i.e. a public bond, a private placement or a bank term loan.
- An appropriate dividend policy to be followed by the company.
You are required to:
Question 1) Calculate the company's Weighted Average Cost of Capital (WACC), assuming a tax rate of 30%.
Question 2) Advise the Board of Directors on which one of the three types of financing would be most appropriate for the company.
Question 3) Advise the Board of Directors on three practical considerations that should be taken into account when setting a dividend policy.
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