A company has annual earnings before interest and tax of £15 million. These earnings will remain constant.
The market price of the company’s shares is 86p per share, cum div. and of debentures £105.5 per debenture, ex interest.
An interim dividend of 6p per share has been declared, tax rate is 31%, and all available earnings are distributed as dividends.
The capital structure of the firm is as follows:
Ordinary shares(25p ) £12.5 million
16% Debentures £23.697 million
Calculate the cost of capital of the company.