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In: Accounting

This quiz is based on the following information: Calculate the cost of capital for company with...

This quiz is based on the following information:
Calculate the cost of capital for company with the following capital structure
>1,500,000 ordinary shares, market price R4 per share. Last dividend was 93c per share. Dividend growth was 14% for past 5 years
>1,000,000 12%, R1 preference shares with market value of R3 per share
>R1,000,000 9% debenture due in 7 year and the current YTM is 10%
>R1,300,000 15% bank loan, due in June 2024
>Company tax rate is 30%

Expert Solution

Step: 1 Calculation of weighted average cost of capital

Calculation of Weighted average cost of capital
Source	Market value	Weight In %	Cost of capital	Weighted average cost of capital
Equity shares	6000000	53.097	40.50%	21.504
12% Prefrence shares	3000000	26.549	12.00%	3.186
9% Debentures	1000000	8.850	7.35%	0.650
15% Bank Loan	1300000	11.504	10.50%	1.208
	11300000			26.549

Calculation of Weighted average cost of capital
Source	Market value	Weight In %	Cost of capital	Weighted average cost of capital
Equity shares	=4*1500000	=C6/C10*100	0.405	=D6*E6
12% Prefrence shares	=3*1000000	=C7/C10*100	0.12	=D7*E7
9% Debentures	1000000	=C8/C10*100	0.0735	=D8*E8
15% Bank Loan	1300000	=C9/C10*100	0.105	=D9*E9
	=SUM(C6:C9)			=SUM(F6:F9)

Step: 2 Calculation of Equity

= Ke.= Expected Dividend / market price + Growth

= Expected dividend = 0.93 14%

= Dividend= 1.06

= Ke= 1.06 / R4 *100 + 14%

Ke = 40.50%

Step: 3 aCalculation of Cost of debentures

Kd = (I (1- T) + (RV - NP)/N) / (RV +NP/2)

Kd = 9*(1-30%) + (110-100/7) / (110+100/2)

Kd = 7.35%

Step:4 Calculation of Cost of Prefrence shares

It is givien to us that is 12%

Step:5 Calculation of Cost of Bank loan

Kd= I (1- T)

Kd= 15% (1-30%)

Kd= 10.5%

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