Omega company has the following capital structure as at 31st December 2020:
Ordinary share (600,000 shares) Sh. 15,000,000
Retained Earnings 9,000,000
10% bonds 3,000,000
8% preference shares (300,000) 3,000,000
Total 30,000,000
The company has just paid a dividend of sh. 2 per share and its expected growth rate is 10% forever. The current market price of the share is sh. 20. The current market price of preferred shares is sh. 8. The company intends to venture into a lucrative business opportunity from next year which will require financing worth sh. 120M. The company expects to earn a net income of sh. 100M of which 10% will be paid out as dividend. The company will require a new issue of ordinary shares at sh. 40 with no floatation costs. Preferred shares will be issued at sh. 16 with 5% floatation costs. New bonds issued beyond break point have a cost of 12%. Assume a tax rate of 30%. Ordinary shares will be issued at the current cost.
What is the current cost of bonds?
Select one:
A. 7%
B. 10%
C. 8%
D. None of the above
