In: Accounting
Gidimadjor has the following capital structure
GH¢ 000 GH¢ 000
Equity and reserves
Ordinary shares 23,000
Reserves 247,000 270,000
Non-current liabilities
5% Preference shares 5,000
6 % loan notes 11,000
Bank loan 3,000
19,000
289,000
The ordinary shares of Gidimadjor are currently trading at GH¢ 4·26
per share on an ex dividend basis
and have a nominal value of GH¢ 0·25 per share. Ordinary dividends
are expected to grow in the future
by 4% per year and a dividend of GH¢ 0·25 per share has just been
paid. The 5% preference shares have
an ex dividend market value of GH¢ 0·56 per share and a nominal
value of GH¢ 1·00 per share. These
shares are irredeemable. The 6% loan notes of Gidimajor are
currently trading at GH¢ 95·45 per loan
note on an ex interest basis and will be redeemed at their nominal
value of GH¢ 100 per loan note in five
years’ time. The bank loan has a fixed interest rate of 7% per
year. Gidimajor pays corporation tax at a
rate of 25%.
Required:
a. Calculate the after-tax weighted average cost of capital of
Gidimadjor on a market value basis.
b. Discuss the connection between the relative costs of sources of
finance and the creditor hierarchy.
(Total: 15 marks)
ANSWER:
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