Question one
Jubal Ltd is a quoted company which is financed by 10,000,000 ordinary shares and Kshs. 50,000,000 of irredeemable 8% debentures. The market value of each share is Kshs. 20 ex-dividend and an annual dividend of Kshs. 4 per share is expected to be paid in perpetuity. The debentures are considered to be risk free and are priced at par.
Mr. Kilunda, the managing director of the company is wondering whether to invest in a project which would cost Kshs. 20 million and yield Kshs. 3.8 million a year before tax in perpetuity. The project has an estimated beta value of 1.25. The rate of return well-diversified portfolio is 16 percent.
Required:
a) The weighted average cost of capital of the company
b) The beta of the company
c) The beta of the equivalent ungeared company, ignoring taxes
d) Advise the company whether to undertake the projects using the results above