Chapter 6: The Cost of Capital

Two companies are described below. Corporation tax is 30% in both, and tax relief on interest is received in the same year as the interest.

(a) J plc is financed as follows. Equity: 5 million $1 shares quoted at $2.50 cum div, on which a constant dividend of 32c per share is about to be paid. Debt: $4M 8% debentures quoted at 92 ex int (the debt is irredeemable).

(b) K plc is financed as follows. Equity: 10 million $1 shares quoted at $3.20 ex div, on which a dividend of 20c per share has just been paid; dividends are growing at 8% p.a. Debt: $6M 10% debentures quoted at 105 ex int, redeemable in 6 years' time at a premium of 10%. Table factors: 10% annuity years 1-6 4.355, present value year 6 0.564; 5% annuity years 1-6 5.076, present value year 6 0.746.