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Estimate the weighted average cost of capital for MRT Ltd

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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.

Reference no: EM132744076

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