Boring business systems Ltd wants to raise new capital to finance a new project. The firm will issue 200,000 ordinary shares (Sh. 10 par value) at Sh. 16 with Sh. 1 floatation costs per share, 75,000 12% preference shares (Sh.20 par value) at Sh.18 with sh.150,000 total floatation costs, 50,000 18% debentures (sh. 100 par) at Sh.80 and raised a Sh.5,000,000 18% loan paying total floatation costs of Sh.200,000 Assume 30% corporate tax rate. The company paid 28% ordinary dividends which is expected to grow at 4% p.a. Required
i. Determine the total capital to raise net of floatation costs.
ii. Compute the marginal cost of capital. (9 Marks)
b) Demonstrate the weakness of using weighted average cost of capital as a discounting rate.
(6 marks)

Answer rating: 100% (QA)

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