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A company has annual earnings before interest and tax of £15

Resolved Question:

A company has annual earnings before interest and tax of £15 million.These earnings will remain constant.

The market price of the company's shares is 86p per share, cum div. and of debentures £105.5 per debenture, ex interest.

An interim dividend of 6p per share has been declared, tax rate is 31%, and all available earnings are distributed as dividends.

The capital structure of the firm is as follows:

Ordinary shares(25p ) £12.5 million

16% Debentures £23.697 million

Calculate the cost of capital of the company.
Submitted: 9 months ago.
Category: Single Problem
Expert:  F. Naz replied 9 months ago.
Have a nice day

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Customer: replied 9 months ago.

Hey thanks, XXXXX XXXXX wondering if you could clarify a few things for me. How did you calculate 1)ordinary shares 2) dividends per share 3) cost of shares? will give top rating if you explain well .thank you

Expert:  F. Naz replied 9 months ago.
total amount of capital is 12.5 million and the per share par value is 25 pence, therefore divided 12.5/0.25 = 50 million sahres.

The net income calculated is 7.7338 million, as the company distributes all earnings therefore the dividend is equal to 7.7338/50 = 0.15468 or around 15 pence.

Then divide dividend by ex dividend price which is 86-6 = 80 pence or 0.8, therefore the cost of sahres is .15468/.80 = .1933 or 19.33%
F. Naz, B.Com
Category: Single Problem
Satisfied Customers: 4087
Experience: Have completed B.Com and CA Finalist
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