nce Shares 70,000 70,000 Ordinary shares 60,000 50,000 The prevailing rate of Treasury Bills is 10% and the return of the Ghana Stock Exchange is currently 15%. The financial manager believes that the beta of industry in which the project belongs is 1.5. The corporate tax rate is 25%. Which of the two options will you recommend for financing the new project?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Mr. Afrifa, the
equity,
Option 1 Option 2
GH¢ GH¢
10% Bonds 70,000 80,000
6% Preference Shares 70,000 70,000
Ordinary shares 60,000 50,000
The prevailing rate of Treasury Bills is 10% and the return of the Ghana Stock Exchange is
currently 15%. The financial manager believes that the beta of industry in which the project
belongs is 1.5. The corporate tax rate is 25%.
Which of the two options will you recommend for financing the new project?
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