A company manufactures a product for both the locals and for export. The company pays a corporate tax of 35% and has the following capital tax structure.
1. Ordinary shares; 1050000 ordinary shares with nominal value of 0.28 per share. The market value per share is 0.82. A dividend of 0.80 per share has been just paid and dividends are expected to grow by 6.5% per year for the foreseeable future.
2. Preference shares; 265000 preference shares of nominal value 0.55 per share. The market value of the share is 0.50 per share and the annual net dividend of 8% has just been paid.
3. Bonds; 120000 of 6%irredeemable bonds with a market price of 105 per 100par. The annual interest payment has just been made
Required:
a) Explain the difference between the capital and the weighted average cost of capital.
b) Why is it import for the cost of capital to be calculated correctly?
c) Calculate the weighted average after tax cost of capital.