Answer to Question #301787 in Management for Kaylor

Question

The following is the capital structure of XYZ Ltd as at 31/12/2019.

Sh. Million

Ordinary share capital sh. 10 par value

400

Retained earnings

200

10% preference share capital Sh.20

par

100

Value

200

12% debenture Sh.100 par value

900

Additional information

1. Corporate tax rate is 30%

2. Preference shares were issued 10 years ago and are still selling at par value.

3. The debenture has a 10 year maturity period. It is currently selling at Sh.90 in the market.

4. Currently the firm has been paying dividend per share of Sh.5. The Dividend Per Share is expected to grow at 5% p.a. in future. The current market price per ordinary share is sh. 40.

Required;-

Determine the Weighted Average Cost of Capital of the firm.

Answer 1

Kp$=$ D$+$ $($ RV$-$ SV$)$ $/$ N$÷$ $(RV+SV)/2$

Where D= Dividend of preference shares.

SV=Issue price per share minus floation cost.

N= No of years for redemption.

RV= Net price payable on redemption.

Kp=$14(100-92)/12÷(110+95)/2$

$=(14+6.7)/95.$

$= 15.28$