Question

Blackboard Эх со Remaining Time: 1 hour, 32 minutes, 42 seconds Question Completion Status 4 5 6 7 Moving to another question will save this response. Question 6 of Question 6 12 points Fred Wilford is the finance director of TSA Ltd. He would like to know the cost of capital for the business in order to assess new investment opportunities The company's common stock are currently priced at $25 per share. The company announced that it will pay $2.5 per share for its ordinary shareholders and it expects its future dividends to gre at a constant rate of 6% per annum. The common stocks were issued with a flotation cost of $1.2 per share The company pays $5 on its preferred stocks which are currently priced at $20 per share. When the preferred stocks were issued the company paid $2 per share in flotation cost. The company has a capital structure made up of 60% common equity, 154 preferred stock and 25 debt. Required: A Calculate the cost of preferred stocks. (2 marks) B. Calculate the cost of common equity. (2 marks) C. The company has a $20m bank loan on which it pays 8% on its bank loan. Using the information you now have about the company, calculate the weighted average cost of capital (WACC)fort company. (8 marks) Note: Show all your workings and use two decimal point in your calculations. Aria 3 [12pt) E. E T.A. TTTT Paragraph %DO QUE @fMashups - 1 TT

Answer 1

Cost of Equity = [Dividend/Market Price(1-Float cost%) + Growth Rate ie, 2.5/25(1-(1.2/25))+0.06 = 16.50%

Cost of Preference Share = Dividend/(Preference share - Floatation cost) => 5/(20-2) = 27.78%

Cost of Debt = 8%

Weighted Cost of Capital = Weight*Cost of Equity + Weight*Cost of Preference +Weight*cost of debt

Ie, = 0.6*16.5% + 0.15*27.78% + 0.25*8% => 9.9+ 4.167 + 2 => 16.067%

So,

A. 27.78%

B. 16.5%

C. 16.067%