The management of Phileas Fortune Ltd wants to know the cost of capital associated with expanding its business. You have been told that funds will be raised for this purpose according to a target capital structure reflected in the market value of its securities. Your task is to calculate the cost of capital for the company. The following information may assist you in your task:

Information of the current capital components:

Debt Component Market value ($'000s) Cost (%)

Debentures 2 500 13

Equity Component Market value ($'000s) Cost (%)

Ordinary shares 9 000 ??

Preference shares 500 14

The beta of equity of Phileas Fortune Ltd was recently estimated at 1.5, while the consensus view is that the expected rate of return for the market is 10%. The government 10-year bond is expected to yield 4% p.a. The company income tax rate is 30 cents in the dollar.