Question 3 (30 marks) Metacorp Limited plans to raise new capital for its projec

Question 3 (30 marks)
Metacorp Limited plans to raise new capital for its project in Queensland. You are employed to
estimate its cost of capital for use in capital budgeting decision. The treasurer has given you the
following information and has asked you to calculate the weighted average cost of capital for the
company.
The company currently has an outstanding bond with 12% coupon rate and a convertible bond with an
8.1 % coupon rate. The firm has been informed by an investment banker that bonds of equal risk and
credit rating are now selling at a yield of 14 % per annum. The common stock has a price of $30 with
an expected dividend (D1) of $1.30 per share. The expected growth rate for earnings and dividends per
share is 12% per annum in the future. The preference stock is selling at $60 per share and carries a
dividend of $6.80 per share. The flotation costs are 3% of the selling price for the preference shares
no floatation costs will be incurred for any new debt and common stocks issued. The capital structure
of the firm is comprised of 45% debts 5 % preference shares and 50% common shares. The corporate
tax rate is 30%.
Calculate the cost of capital for the individual components in the capital structure and then calculate
the weighted average cost of capital for Metacorp. Consider after-tax cost of capital in your
calculations.