Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
A company has the following book value in capital structure:
GHSM
Equity capital (in shares of GHS 10 each, fully paid-up at par)
15
11% Preference capital (in shares of GHS 100 each, fully paid-up at par)
1
Retained earnings
20
13.5% Debentures (of GHS 100 each)
10
15% Term Loans
12.5
The next year expected dividend on equity shares is GHS 3.60 per share and the dividend per
share is expected to grow at 7% into the foreseeable future. The market price per share is GHS 40.
redeemable after six years, are selling at GHS 80 per debenture. The income-tax rate for the
company is 40%
Required
Calculate the weighted average cost of capital of raising new capital.
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