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

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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.
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Customer: replied 3 years 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

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%
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