QUESTION ONE

The financial data given below shows the capital structure of Akabebi Company
Limited.
10% Sh.1,000 debenture 4,900,000
Ordinary share capital 18,000,000
(Sh.20)
Retained earnings 6,000,000
28,900,000

The structure is considered optimum and the management would wish to maintain this
level.
Akabebi Company Limited intends to invest in a new project which is estimated to cost
Sh.16,800,000 with an expected net cash flow of Sh.3,000,000 per annum for 10 years.
The management has proposed to raise the required funds through the following
means:
1. Issue 100 10% debentures at the current market value of Sh.5,000 per debenture.
2. Utilise 60% of the existing retained earnings.
3. Issue 10% Sh.20 preference shares at the current market price of Sh.25 per share
4. Issue ordinary shares at the current market price of Sh.45 per share. Floatation
cost per share is estimated to be 12% of the share value.
The company’s current dividend yield is 5% which is expected to continue in the
near future. Corporation tax rate is 30%.
Required:
a) Determine the current dividend per share. (3 marks)
Determine the number of ordinary shares to be
b) issued. (2 marks)
Determine the marginal cost of capital for Akabebi Company Ltd based
c) on the
above information. (8 Marks)
Evaluate whether it is viable to invest in the proposed project (Round
d) off your answer for cost of capital to the nearest 1) (2 marks)