Kimberley Engineering Limited (KEL) has the following capital structure (data in ZAR): 14% Debt 937,500 10% Preferred Stock 312,500 Common Stock (KShs. 25 par) 3,750,000 Total 5,000,000 KEL is contemplating to raise ZAR1,000,000 in the coming period to finance an expansion project. The company expects to earn a net profit of ZAR 465,000 this year and to pay a dividend of ZAR 1.50 per share. Earnings are expected to grow at 10% per year perpetually and a constant dividend payout ratio is to be maintained. A share of KEL’s stock is currently trading for ZAR 27.50. New issues of stock are expected to attract a 2% floatation cost and are likely to sell for ZAR 3 below the current market price. New preferred stock can be sold at ZAR 23.00 less floatation costs of ZAR 3.00 per share. A dividend of ZAR 2.00 will be paid per share of this stock. New debt can be sold at par at an interest rate of 17 percent to raise up to ZAR 120,000. Beyond this, the interest cost of debt will be 20 percent. The company is in the 30 percent tax bracket and intends to maintain its capital structure at the current level, which is considered optimal.

Required a) Determine the cost of each capital structure component.

b) Find the breaking points in the MCC schedule.

c) Prepare the MCC schedule.

Answer rating: 100% (QA)

ANSWER a Cost of each capital structure component Debt The cost of debt can be calculated as follows Cost of Debt Interest rate x 1 Tax Rate For the f... View the full answer