Define

a) what is capital structure.

b) what is cost of capital.

Somaco LTD is planning to build abusiness commercial complex along entebbe highway. The project will cost she 180 million.

Somaco current capital structure which is considered optimal is as follows

Debt = 384,000

Ordinary shares (per value she 10 )= 480,000

Retained profits= 96,000

New debt will be obtained from commercial Bank at an interest rate 15%.

ordinary shares current market price 30 per share with dividend of shs. 5 per share expect growth rate 5%. Floation costs amount to 4%.

The marginal tax rate is 40%

1. Determine how much of the shs 180 million is to be raised by equity capital if the capital structure is to remain unchanged.

2. Determine how much of capital must come from retained earnings.

3. Determine how many new ordinary shares have to be floated to raise the required portion of equity capital.

4. Calculate the investment's marginal cost of capital. Given the following data: risk free return on treasury bill is 5%, market price is 10% and beta(B) is 2. Required calculate the cost of equity