QUESTION $4$

$($a$)$ You have been asked to analyze the capital structure of ABC Inc, and make recommendations on a future course of action. ABC Inc. has $4$ million shares outstanding, selling at $K2$ per share and a debt$-$equity ratio $($in market value terms$)$ of $0\mathrm{.}25.$ The beta of the stock is $1\mathrm{.}15,$ and the firm currently has a market interest rate of $10\%.$ The firm's income statement is as follows:

EBIT

Interest Exp.

Taxable Income

Taxes

Net Income

K$15$ million

K $2$ million

K$13$ million

K $5\mathrm{.}2$ million

K $7\mathrm{.}8$ million

The current risk free rate is $8\%$ and the market risk premium is $5\mathrm{.}5\%.$

What is the firm's current weighted average cost of capital?

$(12$ marks$)$

$($b$)$ Capital Ltd$.$ is a big company listed on the LuSE. It has the following capital structure:

$\backslash$table$[[$Kwacha millions,$],[$Debt $(8\%),25],[$P$.$S $(5\%,$ K$100$ par$),15],[$C$.$S $($K$100$ par$),10],[$R$.$E$,23]]$

The current dividend for the company is $K50/$share and is expected to grow at $3\%$ per year in the foreseeable future. The equity shares trade at K$450/$share$.$ The preferred shares trade at K$104/$share$.$ The debt currently trades at K$1,000$ per K$1,000$ nominal value bond. T firm's tax rate is $30\%.$

What is the firm's current weighted average cost of capital?

$(13$ marks$)$