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What would be the impact to the cost of capital

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Question - The Kyoto Company Ltd wishes to expand its business. On 31 May 2020, the company had the following existing and proposed capital structures to support the expansion program.

The existing 8% debt capital has a book value of Kshs 500,000 and matures in 95 years. The market value of the debt at the close of business on 31 May 2020 was Kshs 400,000.

A ten-year loan of Kshs 3 million is to be raised at an interest of 10% per cent per annum.

A 12% preference stock capital stands in the books at Kshs 1 million (10,000 shares) and has a total market value of Kshs 1.5 million.

There are 400,000 ordinary shares with a current market price of Kshs 15 each. The firm's expected earnings per share (EPS) stand at Kshs 2, its growth rate is 6% and has dividend payout of 60%.

Required -

Compute firms current weighted average cost of capital.

What would be the impact to the cost of capital of incorporating trade credit as part of the debt capital, particularly where the firm has substantial creditors?

Capital Structure is the mix of a firm's permanent long-term financing and equity and varies significantly among firms.

Reference no: EM133088782

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