QUESTION 5

a) The following data show the capital structure of Samma Ltd.

$ "000"

10% sh. 1,000 debentures

Ordinary share capital

Retained earnings

4,900

18,000

6,000

The management of Samma Ltd. intends to invest in a project estimated to cost $.16, 800,000.

The cost of the project will be raised as follows:

Issue 10% 100 debentures at the current price of $ 5,000.

Issue 10% sh. 20 preference shares at the market price of $ 25.

Issue ordinary shares at the current market price of sh. 45 with floatation cost of 12%.

Utilise 60% shares at the current market price of $ 45. with floatation cost of 12%

The company's current dividend yield is 5% while the tax rate is 30%.

Required:

The weighted marginal cost of capital.