Answer Happy

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?