Reference no: EM132744076
Question - The following figures have been extracted from the financial statements of MRT Ltd:
Book Value of Current Assets $35 million and Current Liabilities $29.25 million
Long-term Loan: $7.19 million
Retained Earnings: $22.50 million
9% Debentures: $27 million debentures issued at $1,000.
General Reserves $7.50 million
Preference Share Capital: 8.8 million shares issued at $3 per share
Ordinary Share Capital: 38 million shares issued at $1 per share
The following additional information has been provided by the manager of the company:
Government bonds are currently yielding 5.2% per annum.
The current market return on equity is estimated to be 15.7% per annum.
A merchant banker suggests that MRT Ltd would have to offer a rate of 13.8% p.a. on any new issue of 19-year debentures.
Debenture coupons are paid semi-annually, with 19 years to maturity.
The company tax rate is 32%.
Preference shares of MRT Ltd are currently traded at $2.33 per share
MRT Ltd ordinary shares have recently traded at $3.51 and the company's financial manager believes that a beta of 1.8 is appropriate for the company.
Required -
A. Using relevant information, estimate the weighted average cost of capital for MRT Ltd.
B. Using your own words, explain any four relevant factors that can affect the cost of capital.