Reference no: EM133118181
Omega company has the following capital structure as at 31st December 2021:
Ordinary share (600,000 shares) Sh. 15,000,000
Retained Earnings 9,000,000
10% bonds 3,000,000
8% preference shares (300,000) 3,000,000
Total 30,000,000
The company has just paid a dividend of sh. 2 per share and its expected growth rate is 10% forever. The current market price of the share is sh. 20. The current market price of preferred shares is sh. 8. The company intends to venture into a lucrative business opportunity from next year which will require financing worth sh. 120M. The company expects to earn a net income of sh. 100M of which 10% will be paid out as dividend. The company will require a new issue of ordinary shares at sh. 40 with no floatation costs. Preferred shares will be issued at sh. 16 with 5% floatation costs. New bonds issued beyond break point have a cost of 12%. Assume a tax rate of 30%. Ordinary shares will be issued at the current cost.
a) What is the current cost of ordinary shares?
b) What is the current cost of bonds?
c) What is the current cost of preferred shares?
d) What is the Break point?
e) What is the marginal cost of capital?