Kwasi and Co. Ltd has the following capital structure as at 31 December 2021: 10% Debentures...

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Kwasi and Co. Ltd has the following capital structure as at 31 December 2021: 10% Debentures 9% Preference Shares Equity (5000 shares @ 100 each) 300,000 200,000 500,000 1,000,000 Each equity shares of the company currently sells for GHS 102 and the company is expected to declare a dividend of GHS 9 per share for 2021 and this dividend is expected to grow at 5% into the foreseeable future. Required: (a) Assuming the tax rate applicable to the company is 50%, calculate the weighted average cost of capital using the book values. (b) Assuming that the company wants to raise additional capital through additional term loan of GHS 500,000 @ 12% to finance expansion. The company's assessment is that the dividend declared will be GHS 10 instead of GHS 9, and the business risk associated with the new financing will bring the market price to GHS 96 per share. Calculate the revised WACC (based on the book values) and advise whether or not the company should finance an expansion. (c) Apart from the answer in part (b) above, what quantitative factors should the firm consider in its investment decisions? Kwasi and Co. Ltd has the following capital structure as at 31 December 2021: 10% Debentures 9% Preference Shares Equity (5000 shares @ 100 each) 300,000 200,000 500,000 1,000,000 Each equity shares of the company currently sells for GHS 102 and the company is expected to declare a dividend of GHS 9 per share for 2021 and this dividend is expected to grow at 5% into the foreseeable future. Required: (a) Assuming the tax rate applicable to the company is 50%, calculate the weighted average cost of capital using the book values. (b) Assuming that the company wants to raise additional capital through additional term loan of GHS 500,000 @ 12% to finance expansion. The company's assessment is that the dividend declared will be GHS 10 instead of GHS 9, and the business risk associated with the new financing will bring the market price to GHS 96 per share. Calculate the revised WACC (based on the book values) and advise whether or not the company should finance an expansion. (c) Apart from the answer in part (b) above, what quantitative factors should the firm consider in its investment decisions?

Answer rating: 100% (QA)

a Weighted Average Cost of Capital WACC is calculated as the weighted average of the cost of debt an... View the full answer