Reference no: EM132219553

Cost of Capital QUESTION -

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 (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) - $800000.00

Preference shares ($100 per share) - $200000.00

Equity shares ($ 10 per share) - $1000000.00

Total - $2000000.00

All these securities are traded in the capital markets, recent prices are:

Debenture $110 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 per Preference share redeemable at par; 10 year maturity, 14% dividend, 5% flotation costs, sale price $100

(iii) Equity shares: $2 per share flotation cost, 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%.