Capital Cost Assessment: Dividend Models & Project Implications

This assignment provides detailed solutions to questions related to the cost of capital. It includes calculations for the cost of ordinary shares using the dividend growth model, the cost of preference shares, and an evaluation of the weighted average cost of capital (WACC). The solution also addresses the importance of adjusting the cost of capital based on changing market and organizational conditions, emphasizing the need for accurate project evaluation. Furthermore, it calculates the cost of debt for a company, considering both coupon payments and the impact of taxes. The assignment references academic sources to support its analysis and calculations. Desklib offers a wide range of solved assignments and study resources for students.

Finance

TABLE OF CONTENTS
Question 1........................................................................................................................................3
Question 2........................................................................................................................................3
Question 3........................................................................................................................................4
Question 4........................................................................................................................................4
Part A...........................................................................................................................................4
Part B...........................................................................................................................................4
References........................................................................................................................................6

QUESTION 1
Cost of Ordinary Shares as per the Dividend Growth Model:
Ke=(D 1/P 0)+G
D1: Expected Future Dividend at Time (1 period later)
P0: Ex-Dividend Equity Value today
Ke: Cost of Equity per period
G: Constthe ant periodic rate of Growth in dividend from Time 1 to infinity
D0: Dividend paid ((Vernimmen et.al, 2014))
Therefore D1: D0 * (1+Growth Rate)
=1.60 * (1+.02)
=1.632
Ke= (1.632/11.66)*100 + 2%
= 13.99 + 2
= 15.99%
QUESTION 2
Cost of Preference Shares:
¿
= 12 / 80 * (1 - .05)*100
= 12 / 76*100
= 15.78%

QUESTION 3
In the given case situation boss is not correct; it is because an organization is completely entitled
to the cost of capital revisions because of the changing market as well as organizational
situations. Additionally, the organization could be subjected to an error while purchasing the
similar capital cost for every future project (Amihud et al., 2015). However, for not making the
same error, it is obliged that two key conditions are required to be satisfied.
 To this note, the first condition is that the future anticipated projects are required to be
providing financial support with the similar blend of capital with which the overall
organization is presently financed (Gitman, Juchau and Flanagan, 2015).
 Additionally, the future based projects should include the similar extent of sophisticated
risks as that of the standard projects that the organization is presently conducting its
operations (Vishny and Zingales, 2017).
Therefore, the decision maker is required to modify the cost of capital with the changing
circumstances in order to ensure the selected project is viable for the purpose of investment.
QUESTION 4
Part A
Cost of debt = Coupon payment/ Price of bond
=95/1200
=7.9167%
And the cost of debenture after tax will be .079167*(1-.3)
=5.54%
Part B
Cost of debt = Coupon payment/ Price of bond
=95/1000
=9.5%
And the cost of debenture after tax will be .079167*(1-.3)

=6.65%

REFERENCES
Amihud, Y., Hameed, A., Kang, W. and Zhang, H., 2015. Stock liquidity and the cost of equity
capital in global markets. Journal of Applied Corporate Finance, 27(4), pp.68-74.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., 2014. Corporate finance:
theory and practice. John Wiley & Sons.
Vishny, R. and Zingales, L., 2017. Corporate Finance. Journal of Political Economy, 125(6),
pp.1805-1812.c