| cost of capital
Brama Pandey 13 Groupof companies has the following capital structure as at 31st March 2009 which is considered to be optimum.
14% Debenture $300,000
11% Preference $100,000
Equity(100,000 shares) $1,600,000
year earning per share(EPS)$
1989 1.00
1990 1.10
1991 1.21
1992 1.33
1993 1.46
1994 1.67
1995 1.77
1996 1.95
1997 2.15
1998 2.36
The company can issue 16% new debentures. The company's debenture is currently selling at $96.00, paying a dividend of $1.10 per share.The company's marginal tax rate is 50%.
a) Calculate the after tax cost (i) of new debt, (ii) of new preference capital and (iii) of ordinary equity, assuming a new equity comes from retained earning.
b)Find the marinal cost of capital assuming no new ordinary shares are sold? Assume that retained earnigs available for next year's investment are 50% of 1998 earnings.
c) What is the marginal cost of capital if the firm can sell new ordinary shares to net $20 a share? The cost of debt and preference capital is constant.
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