The capital structure of a company consists of the following items Sh.3m ordinary share 30m Retained Earnings
Question:
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.
Financial and Managerial Accounting
ISBN: 978-0132497978
3rd Edition
Authors: Horngren, Harrison, Oliver