Question

Cost of Capital Analysis

Nthanda Corporation Plans to embark into a New Market in Botswana. The risk profile in 

Botswana is considered not much different with the other projects in the company. However, 

the company should identify the justified discount rate for them to analyze the proposed 

investment in Botswana.

The company has 1 million common shares outstanding with a cum-interest selling price of 

K11.25 per share with a 25 ngwee divided paid in the past year. Based on previous 

performance, the company has an expected growth rate of 5% per annum with a k10 issuance 

cost per share. The issuance cost has forced the company to avoid issuing new shares as it 

will contribute in increasing the overall cost of capital for the company

The company has further issued 150,000 preferred shares with a market price of k9.5 per 

share and a dividend of 95 ngwee per share. There is an anticipated discount price of 5% 

from the market price and a cost of K25 per share should there be an issue in future in raising 

external capital for the business expansion.

In addition to all this, the company utilized another strategic financing platform based on the 

corporate bonds. With an overall value of K10 million at par, 10 years maturity period and 

coupon interest rate at 11%. The cost of issuing New corporate bonds will be 6% above par 

value and the corporate tax rate is 35%.

Required:

i. Calculate the Total Value of Nthanda Corporation

ii. Calculate the cost of Common Equity

iii. Calculate the Cost of Preference Shares

iv. Calculate the Cost of Debt

v. Calculate the Weighted Average Cost of Capital (WACC) based on market and 

book values which the company can use to evaluate the project