Calculation of Cost of Capital

Mambo Ltd. Intends to raise sh 4800,000 from the different sources as shown
below
Sh.
Ordinary share capital(per value Sh.20) 2,400 000
8% preference shares capital (per value 12) 960,000
18% Bank Loan 840, 000
20% debentures of sh 100 each 600, 000
Total 4800 000
Additional information:
The market price for the securities is:
Sh.
Ordinary shares 32
8% preference shares 15
20% Debentures 90
The company has maintained payment of ordinary dividend per share of Sh.4.00 and is expected to grow at 3 % per annum in perpetuity. The floatation costs for ordinary and preference share are sh 4.00 and sh.2.00 respectively
Calculate:
(i) Cost of each source of capital
(ii) Weighted average cost of capital

Anthony from Kenya

Important Resource for study

1.  Cost of Capital and its Method

2. WACC

3. Cost of Equity Capital

4. Cost of Preference Capital 

 

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