Capital FM Ltd. had the following capital structure as at 31 March 2005:
Shs.
Ordinary share capital (200,000 shares) 4,000,000

10% Preference share capital 1000000
14% Debenture capital 3000000


Additional information:
1. The market price of each ordinary share as at 31 March 2005 was Shs. 20.
2. The company paid a dividend of Shs. 2 for each ordinary share for the year ended 31 March 2005.
3. The annual growth rate in dividends is 7%.
4. The corporation tax rate is 30%.
Required:
(i) Compute the weighted average cost of capital of the company as at 31 March 2005.

(ii) The company intends to issue a 15% Shs. 2 million debenture during the year ending 31 March 2006. The existing debentures will not be affected by this issue. The dividend per share for the year ending 31 March 2006 is expected to be Shs. 3 while the average market price per share over the same period is estimated to be Shs. 15. The average annual growth rate in dividends is expected to remain at 7%.
Compute the expected weighted average cost of capital for the company as at 31 March 2006.

Answer rating: 100% (QA)

The detailed answer for the above question is provided below i Weighted A... View the full answer