The capital structure of a company consists of the following

The capital structure of a company consists of the following items

Sh.3m ordinary share

30m


Retained Earnings

20m


1m 10% pref. shares

20m


0.2m 6% debentures

30m



100m


The current market value of the company’s ordinary shares is sh.30. The expected dividends per share at the end of the year is sh.1.20.  

The average growth rate in dividends has been 10% and this is expected to be maintained in the foreseeable future. The debentures of the company have a face value of sh. 150 however they currently sell for 100/= in the market. The debentures will mature in 100 years’ time. The preference shares of the company still sell at their par value. Assume a tax rate of 30%. Calculate the weighted average cost of capital for this company. 

(10Marks)

A debenture is denoted as a 5 years 14% ksh. 3000. The debenture is redeemable at par. If the cost of capital is 11%, determine the value of this debenture. 


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