Omega company has the following capital structure as at 31st December 2020: Ordinary share (600,000 shares) Sh. 15,000,000 Retained Earnings 9,000,000 10% bonds 3,000,000 8% preference shares (300,000) 3,000,000 Total 30,000,000 The company has just paid a dividend of sh. 2 per share and its expected growth rate is 10% forever. The current market price of the share is sh. 20. The current market price of preferred shares is sh. 8. The company intends to venture into a lucrative business opportunity from next year which will require financing worth sh. 120M. The company expects to earn a net income of sh. 100M of which 10% will be paid out as dividend. The company will require a new issue of ordinary shares at sh. 40 with no floatation costs. Preferred shares will be issued at sh. 16 with 5% floatation costs. New bonds issued beyond break point have a cost of 12%. Assume a tax rate of 30%. Ordinary shares will be issued at the current cost. What is the marginal cost of capital? Select one: A. 18.17% B. 18.50% C. 18.34% D. None of the above
Omega company has the following capital structure as at 31st December 2020:
Ordinary share (600,000 shares) Sh. 15,000,000
10% bonds 3,000,000
8% preference shares (300,000) 3,000,000
Total 30,000,000
The company has just paid a dividend of sh. 2 per share and its expected growth rate is 10% forever. The current market price of the share is sh. 20. The current market price of
What is the marginal cost of capital?
Select one:
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
