Quest Exploration Ltd is attempting to take advantage of the commodity boom by increasing its exploration activities.  However, as a junior mining company, it must raise additional capital for further capital investment.  The tax rate of the company is 30%.  You are asked to prepare the following information and financial data. 

Debt: Quest Exploration can raise debt by selling $1,000 par (face) value, 6.5% coupon interest paid semi-annually, 10-year bonds.  In order to sell the issue, an average discount of $20 per bond needs to be offered. 

Preference shares: A number of preference shares can be sold under the following terms: the shares have a face value of $100 per share, and the annual dividend rate is 6% of the face value.  The preference shares are expected to sell for $102. 

Ordinary shares: The current price of Quest Exploration's ordinary shares is $35 per share.  A cash dividend of $3.00 per share was recently paid.  The firm's dividends have grown at an annual rate of 5% and are expected to grow at this rate in the foreseeable future.   

The company is expected to raise $10 million to finance the expansion in which it will sell 4,000 bonds, $1 million from preference shares and the remaining from ordinary shares.

1. 
   
2. Calculate the weights of each source of capital after the fundraising

Calculate the cost of each source of capital

Calculate the weighted average cost of capital in the Quest Exploration new project

Answer rating: 100% (QA)

This question is complete I will divide the solution into three steps 1 Calculate the weights of each source of capital after the fundraising 2 Calcul... View the full answer