FINS1613 Study Guide - Quiz Guide: Dividend Yield, Preferred Stock, Net Present Value

Quest Exploration Ltd is trying to take advantage of the commodity boom by increasing its exploration activities. However, as a junior mining company it will need to raise additional capital over the coming year. The tax rate of the company is 30%. As financial manager, you have prepared the following information and financial data.

Debt: Quest Exploration can raise an unlimited amount of debt by selling $1,000 par (face) value, 6.5% coupon interest 10-year bonds. In order to sell the issue, an average discount of $20 per bond needs to be given. Additionally, floatation costs of 2% of par value will be incurred.

Preference shares: An unlimited number of preference shares can be sold under the following terms: the shares have a face value of $100 per share, the annual dividend rate is 6% of the face value and the floatation cost is expected to be $4 per share. The preference shares are expected to sell for $102 before cost considerations.

Ordinary shares: The current price of Quest Exploration’s ordinary shares is $35 per share. A cash dividend of $3.00 per share was recently paid. The firm’s dividends have grown at an annual rate of 5% and are expected to grow at this rate in the foreseeable future. The floatation cost is expected to be approximately $2 per share.

Retained earnings: Quest Exploration expects to generate $100,000 of retained earnings in the coming year.

Required:

Calculate the specific cost of each source of financing. (Round your answer to the nearest 0.01%).

Prince Publications Ltd (PPL) wishes to estimate its weighted average cost of capital. It has two sources of capital: ordinary shares and 5-year bonds. Currently, the market value of the shares is $18.45 per share and the market value of the bonds is $115.080 per $100 par value. The shares have recently paid an annual dividend of $2.52 per share and the bonds have recently paid an annual coupon interest of $12.80 per $100 par value. The face value of the bonds on issue is $115 million. There are 13,500,000 ordinary shares on issue. The expected growth rate of dividends per share is 2.3% p.a.. Ignore taxes. PPL’s weighted average cost of capital is closest to: a) 13.52% p.a. b) 13.73% p.a. c) 13.95% p.a. d) 15.07% p.a.