Reference no: EM132179195

QUESTION - COST OF CAPITAL

As a financial analyst of a large Company you are required to determine the weighted average cost of capital of the company using (i) book value weights and (ii) market value weights. The following information is available for your perusal.

The company's present book value capital structure is:

	($)
Debentures ($ 100 per debenture)	800000
Preference shares ($ 100 per share)	200000
Equity shares ($ 10 per share)	1000000
	2000000

All these securities are traded in the capital markets. Recent prices are:

Debentures $ 10 per debenture

Preference shares $120 per share

Equity shares $22 per share

Anticipated external financing opportunities are :

(i) $ 100 per debenture redeemable at par; 10 year maturity , 13% coupon rate, 4% flotation costs, sale price $100.

(ii) $ 100 preference share redeemable at par; 10 year maturity, 14% dividend rate, 5% flotation costs, sale price $100.

(iii) Equity shares; $2 per share flotation costs, sale price = $22

In addition , the dividend expected on the equity share at the end of the year is $ 2 per share; the anticipated growth rate in dividends is 7% and the firm has the practice of paying all its earnings in the form of dividends. The corporate tax rate is 50%.