XYZ Ltd is intending to raise capital to finance a new project. The current M.P.S is Sh.43 cum- div of year 2001 declared but not yet paid. For the part 5 years, the company has paid the following stream of dividends.
Year 1997 1998 1999 2000 2001
D.P.S 1.90 2.25 2.60 2.60 3.00
The existing capital structure of the firm is as follows:
Ordinary share capital 40
Retained earnings 35
12% Debenture Sh.100 par 25
The debentures are currently selling at Sh.95 ex-interest. The corporate tax rate is 30%.
(a) Distinguish between cum-div and ex-div M.P.S.
(b) Compute the ex-div M.P.S
(c) Compute the overall cost of capital. Use dividend growth model to determine the cost of equity.
(d) The company wants to raise additional Sh.20 million as follows: 50% from retained earnings
30% from issue of debentures at the current market value
20% from issue of new ordinary shares with 10% floatation costs
(i) Compute the number of ordinary shares to issue to raise the amount required.
(ii) Compute the marginal cost of capital.
a) Cum-div – MPS reflect information on div. Declared but not yet paid.
Ex-div – MPS exclude information on DPS since shareholders
register has been closed.
b) Cum-div MPS 43
Less year 2001 DPS (3)
Ex-div MPS 40