The financial data given below shows the capital structure of Akabebi Company Limited.
10% Sh.1,000 debenture 4,900,000
Ordinary share capital (Sh.20) 18,000,000
Retained earnings 6,000,000
TOTALS 28,900,000
The structure is considered optimum and the management would wish to maintain this level.
Akabebi Company Limited intends to invest in a new project which is estimated to cost Sh.16,800,000 with an expected net cash flow of Sh.3,000,000 per annum for 10 years. The management has proposed to raise the required funds through the following means:
1.Issue 100 10% debentures at the current market value of Sh.5,000 per debenture.
2.Utilize 60% of the existing retained earnings.
3.Issue 10% Sh.20 preference shares at the current market price of Sh.25 per share
4.Issue ordinary shares at the current market price of Sh.45 per share. Floatation cost per share is estimated to be 12% of the share value.
The company’s current dividend yield is 5% which is expected to continue in the near future. Corporation tax rate is 30%.
Required:
(a)Determine the current dividend per share. (3 marks)
(b)Determine the number of ordinary shares to be issued. (2 marks)
(c)Determine the marginal cost of capital for Akabebi Company Ltd based on the above information. (8 marks)
(d)Evaluate whether it is viable to invest in the proposed project (Round off your answer for cost of capital to the nearest 1) (2 marks)
(e)Explain clearly the sense in which depreciation is said to be a source of funds to business firms. (5 marks)
(Total: 20 marks)
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