Question: QUESTION 2 [25 MARKS] ABC ltd has the following capital structure Equity: P10,400,000 20thebe ordinary shares with a market price of P5.20 Reserves: P2,200,000 Preference

QUESTION 2 [25 MARKS] ABC ltd has the following capital structure Equity: P10,400,000 20thebe ordinary shares with a market price of P5.20 Reserves: P2,200,000 Preference shares: P1,050,000 8% P1 preference shares with a market price of 70thebe Loan stock: P800,000 6% debentures with a market price of par (i.e. P80 per P100 nominal value of stock) The ordinary shares dividend recently paid was 50thebe per share. Dividends are expected to grow at 5% per annum for the foreseeable future. The preference shares and loan stock can be assumed to be irredeemable. ABC ltds marginal rate of corporation tax is 30%. Note: 100 thebe = P1 Required: a. Using market values, calculate the following: i. Cost of equity. (3 marks) ii. Cost of preference shares. (3 marks) iii. Cost of loan stock (3 marks) b. Based on the above calculations determine ABC ltds weighted average cost of capital. (10 marks) c. Identify and explain three factors that could influence the cost of the above sources of finance. (6 marks)

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