Green zone is evaluating its cost of capital under alternative financing arrangements. In consultation with investment

[answerhappygod]

Green zone is
evaluating its cost of capital under alternative financing
arrangements. In consultation with investment
bankers, Green Zone expects to be able
to issue new debt at par with a coupon rate of 8% and to issue new
preference shares with a Ksh.2.50 per share
dividend at a price of Ksh.25. The Ordinary Share of Green Zone is
currently selling for Ksh.20. Green zone expects to pay
a dividend of Ksh.1.50 Per share next year. Capital Markets
Authority forecasts a
growth in dividends at a rate of 5% per
year. Green Zone's marginal tax rate is 35%.
a. Calculate the
following:
i. Cost of Debt
ii. Cost of Equity
iii. Cost of Preference Shares
b. If Green Zone raises capital using 45% debt, 5%
preference shares, and 50% ordinary share, what is Green Zone's
cost of capital?
c. If Green Zone raises capital using 30% debt, 5%
preference shares, and 65% ordinary share, what is Green Zone’s
cost of capital?