Weighted Average Cost of Capital. a) Suppose company AA has issued 10 million shares which are...

Weighted Average Cost of Capital.
a) Suppose company AA has issued 10 million shares which are trading at GH¢10 each. It has also issued 2 million preference shares trading at GH¢8, and its 1,000 bonds are trading at GHS10,000 each.
Describe the firm’s capital structure in percentages. [4 marks]
b) Suppose investors require the following rates of return if they are to buy the securities of A:
Common shares: 36%
Preferred shares: 28%
Long-term debt: 24%

i) To meet these rates of return annually and keep investors happy, how much must AA generate? A pays 25% corporate tax. [6 marks]

ii) What is A’s Weighted Average Cost of Capital? [3 marks]

iii) Which class of investors benefits if A generates more? [2 marks]

iv) What happens if A generates less? [2 marks]

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