What is the cost of preference shares

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Reference no: EM132016028

Financial Management

Cax Ltd issued corporate bonds with a coupon rate of 8.0%. The face value is N$100 and the bond is stated on the statement of financial position at its total par value of N$80m. The bonds are currently trading at a price of N$94. Interest is payable annually in arrears. The maturity date is in five years’ time. The company has also issued variable loan finance of N$10m at a current interest rate of 9.0% per year.

The company has 200 000 non-redeemable preference shares which were issued at a price of N$100 each. Preference dividends are payable annually in arrears. The non-redeemable preference shares are currently priced at N$106. The coupon rate is 8% and the company has recently paid the preference dividends for the current year. The company’s equity beta is 1.15 and the risk free rate is 6%. The company uses a market premium of 6.5% as this is the average between 5-8 which is the range of the market premiums recommended by some analysts. The current share price is N$3.20 and the company has 30 million ordinary shares in issue.

Required:

(a) What is Cax’s after-tax cost of debt is taxation is 30%?

(b) What is the cost of preference shares?

Reference no: EM132016028

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