Question 1 The following information is related to JT Company PLC (JT) as at 31st December 2018:
• Issued share capital of JT is $500 million and it comprises with 1,000,000 ordinary shares. JT is a quoted company and its current share price is $250. The dividend paid for the current year was $40 per share and growth rate of annual dividend payment is 5%.
• The retained earnings of JT were $100 million.
• JT has issued irredeemable preference shares for a value of $150 million. This consists of 500,000 preference shares and annual dividend per share is $25. The last traded price of a preference share was $250.; and
• Irredeemable, non-quoted long-term borrowings of JT were $150 million with annual interest rate of 17%. The
company pays income tax at the rate of 28% per annum on its profits.
A company uses only debt and equity to finance its capital budget. The company uses CAPM to compute the cost of equity.
The company estimates that WACC is 12%. The capital structure of the company is 75% debt and 25% equity. The following
additional information is provided:
Salma Limited finances its operations 40% debt and 60% equity. The company cost of debt is 10%. Stocks of the company
currently trade at $55 and dividends of $5 per share was paid. The share is price is expected to grow at a constant rate of 10%