- 8 Marks
AFM – May 2017 – L3 – Q2b – Sources of finance and cost of capital
Calculate the cost of capital for Oheneba Limited with two different capital structures.
Question
Oheneba Limited is considering the acquisition of a concession in the Brong Ahafo region to enable it to start a quarry business. The average industry beta is 1.6 with an equity-to-debt ratio of 2:1.
The following information was extracted from the books of Oheneba Limited:
Income Statement
You are also informed that the long-term debt of the company is considered risk-free with a gross redemption yield of 10% and the beta coefficient of the company’s equity is 1.2, while the average return on the stock market is 15%.
Required:
i) Determine the cost of capital to apply for the appraisal of the quarry if Oheneba Limited will maintain its capital structure after the implementation of the quarry project. (5 marks)
ii) Determine the cost of capital to apply if the company will change its capital structure to 20% debt and 80% equity. (3 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Beta, Cost of Capital, Debt-to-Equity Ratio, Quarry project, Risk-free rate, WACC
- Level: Level 3
- Topic: Sources of finance and cost of capital
- Series: MAY 2017