A new company is planning to raise $300 million. The cost of debt is 14% and the cost of retained earnings is 24.8%. Preferred stock will be sold at $110 and floatation costs of $10 will be incurred. The dividend per share is $18. The company’s ordinary shares are currently being paid a dividend of KSH 7 per share. The current market price is $45 per share. New ordinary shares issued will have a floatation cost of 15%. Earnings and dividends are expected to grow at the rate of 8% in the foreseeable future. The target capital structure is 30% debt, 10% preferred stock, 20% retained earnings and 40% ordinary shares.
Questions
1) Calculate the weighted average cost of capital
2) Determine how the $300 million will be distributed among the capital components
Answers
The working capital can be calculated by establishing the costs of capital components: cost of debt, cost of preferred stock, cost of retained earnings, and cost of new ordinary equity.
