Answer to Question #305724 in Financial Math for Zack

Question

a) You are provided with the following information relating to V ltd

Equity and liabilities

12% debentures (shs1000 at par) 16,000

10% preferences shares 6,250

Ordinary shares (Shs 10 par) 12,500

Retained earnings 28,125

Additional information

i. The debentures are currently selling at Shs 950 in the market

ii. Company paid a dividend of Shs 5.00 per ordinary share and they are expected to grow at a rate of 10% per annum.

iv. The corporation tax is 40%

Required

Effective Cost of debt (3 marks)

Cost of equity (3 marks)

Weighted Average cost of capital (4 marks)

Answer 1

1) Effective Cost of Debt Solution:

$12(1-0.4)=7.2$

2)Cost of equity

$28125+12500+6250=46875$

3)$WACC=12\frac{16000}{16000+46875}(1-0.4)+10\frac{6250}{16000+46875}+10\frac{12500+28125}{16000+46875}=9.29$