Question 1:
Nile Inc is considering an investment of capital to be raised from the issue of new ordinary shares and debentures in a mix which will hold its gearing ratio approximately constant. It wishes to estimate its weighted average cost of capital.
The company has an issued share capital of 1 million ordinary shares of $1 each; it has also issued $800,000 of 8% debentures. The market price of ordinary shares is $4.76 per share and debentures are priced at $77 per cent. Dividends and interest are payable annually. An ordinary dividend has just been paid; the next instalment of interest is payable in the near future. Debentures are redeemable at par in 15 years’ time.
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