The management of Bravo Ltd wishes to determine a suitable discount rate of the evaluation of new projects during the coming year. The management is happy with the present capita structure. The liability side of the Statement of Financial Position is shown as below: Accounts payable TZS 10,000,000 5,000,000 5,000,000 Accruals Short term borrowings 1" Mortgage bonds (8%) 20,000,000 20,000,000 Preferred stock Common stock 30,000,000 Retained earnings 10.000,000 100,000,000 The firm computes its cost of capital by using book values for weights and it is contemplating a capital expenditure programme of TZS 20 million. The common stocks are currently selling at TZS 600 with floatation cost TZS 100. The Total dividend for the coming year is TZS 30 per share. The dividend for the 4 last years were as follow: Year 2009 2010 2011 2012 Dividends 18.50 22.30 25.00 26.50 New bond with a par value of TZS 1000 can be sold at TZS 950 with a floatation cost equal to 10% of its par value. The maturity of the new bond is 10 years from the time they are issued. Preference shares with a par value of TZS 500 and a dividend amount of TZS 50 can be sold at TZS 460 with floatation cost of TZS 10 per share. The firm's taxation rate is 40%. Required: Compute the specific costs of capital. What will be the percentage weights to be applied to each of these sources of financing? What is the firm's weighted average cost of capital? Compute the firm's breaking point. a. b. C. d.
The management of Bravo Ltd wishes to determine a suitable discount rate of the evaluation of new projects during the coming year. The management is happy with the present capita structure. The liability side of the Statement of Financial Position is shown as below: Accounts payable TZS 10,000,000 5,000,000 5,000,000 Accruals Short term borrowings 1" Mortgage bonds (8%) 20,000,000 20,000,000 Preferred stock Common stock 30,000,000 Retained earnings 10.000,000 100,000,000 The firm computes its cost of capital by using book values for weights and it is contemplating a capital expenditure programme of TZS 20 million. The common stocks are currently selling at TZS 600 with floatation cost TZS 100. The Total dividend for the coming year is TZS 30 per share. The dividend for the 4 last years were as follow: Year 2009 2010 2011 2012 Dividends 18.50 22.30 25.00 26.50 New bond with a par value of TZS 1000 can be sold at TZS 950 with a floatation cost equal to 10% of its par value. The maturity of the new bond is 10 years from the time they are issued. Preference shares with a par value of TZS 500 and a dividend amount of TZS 50 can be sold at TZS 460 with floatation cost of TZS 10 per share. The firm's taxation rate is 40%. Required: Compute the specific costs of capital. What will be the percentage weights to be applied to each of these sources of financing? What is the firm's weighted average cost of capital? Compute the firm's breaking point. a. b. C. d.
Chapter11: The Cost Of Capital
Section: Chapter Questions
Problem 12PROB
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Transcribed Image Text:The management of Bravo Ltd wishes to determine a suitable discount rate of the evaluation of new projects during
the coming year. The management is happy with the present capita structure. The liability side of the Statement of
Financial Position is shown as below:
Accounts payable
TZS
10,000,000
Аccruals
5,000,000
Short term borrowings
5,000,000
1" Mortgage bonds (8%)
20,000,000
Preferred stock
20,000,000
Common stock
30,000,000
Retained earnings
10,000,000
100,000,000
The firm computes its cost of capital by using book values for weights and it is contemplating a capital expenditure
programme of TZS 20 million. The common stocks are currently selling at TZS 600 with floatation cost TZS 100. The
Total
dividend for the coming year is TZS 30 per share. The dividend for the 4 last years were as follow:
Year
2009
2010
2011
2012
Dividends
18.50
22.30
25.00
26.50
New bond with a par value of TZS 1000 can be sold at TZS 950 with a floatation cost equal to 10% of its par value. The
maturity of the new bond is 10 years from the time they are issued. Preference shares with a par value of TZS 500 and
a dividend amount of TZS 50 can be sold at TZS 460 with floatation cost of TZS 10 per share. The firm's taxation rate is
40%.
Required:
Compute the specific costs of capital.
What will be the percentage weights to be applied to each of these sources of financing?
What is the firm's weighted average cost of capital?
Compute the firm's breaking point.
а.
b.
C.
d.
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