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What happens to average cost of capital of funa ltd

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Reference no: EM133073278

The following information is available for two small companies Taxo Ltd. and Funa Ltd.

Net operating income : Taxo Ltd = R1 500 000 ; Funa Ltd = R1 500 000

Interest on debt: Taxo Ltd = Nil Funa Ltd: = R 600 000

Cost of equity:

Taxo Ltd= 16% Funa Ltd = 16%

Cost of debt: Taxo Ltd = 12% Funa Ltd = 12%

Note: In answering the questions below assume that the Net Income approach applies and there are no taxes.

Briefly explain, with calculations, what happens to average cost of capital of Funa Ltd. if it sells R3 million of additional equity (at par) to retire R3 million of outstanding debt?

Reference no: EM133073278

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