A local company XYZ ltd. has a capital structure of KShs. 19,200,000 composed of ordinary share capital, preference shares, bank Loan and Debentures as shown below. Source of capital                                                  Amount Ordinary shares capital (par value Shs. 20)             9,600,000 8% preference share capital (par Value 12)            3,840,000 18% Bank Loan                                                       3,360,000 20% Debenture (par value shs. 90)                        2,400,000 The market price of the company securities is given as below: Source of Capital                                                 MPS(Shs) Ordinary Shares                                                   64.00 8% preference shares                                            30.00 20% Debenture                                                     90.00                        The company has maintained payment of ordinary share dividend of Kshs. 4 per share and this is expected to grow at a constant rate into perpetuity. The company has a policy of a constant payout ratio of 60% and a return on equity of 12%. Assuming a tax rate of 40%. Required Compute the cost of:  ordinary share capital, 8% prefences share capital, 18% bank loan and 20% debentures. Determine the weighted average cost of capital (WACC) for the             company

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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A local company XYZ ltd. has a capital structure of KShs. 19,200,000 composed of ordinary share capital, preference shares, bank Loan and Debentures as shown below.

Source of capital                                                  Amount

Ordinary shares capital (par value Shs. 20)             9,600,000

8% preference share capital (par Value 12)            3,840,000

18% Bank Loan                                                       3,360,000

20% Debenture (par value shs. 90)                        2,400,000

The market price of the company securities is given as below:

Source of Capital                                                 MPS(Shs)

Ordinary Shares                                                   64.00

8% preference shares                                            30.00

20% Debenture                                                     90.00                       

The company has maintained payment of ordinary share dividend of Kshs. 4 per share and this is expected to grow at a constant rate into perpetuity. The company has a policy of a constant payout ratio of 60% and a return on equity of 12%. Assuming a tax rate of 40%.

Required

  1. Compute the cost of:  ordinary share capital, 8% prefences share capital, 18% bank loan and 20% debentures.
  2. Determine the weighted average cost of capital (WACC) for the             company                  
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