Wealth Drilling Management is evaluating an opportunity to take on
a project in the oil and gas industry in Dubai. To properly assess
the opportunity, the company must calculate its cost of capital. ut
of The following is the existing capital structure based on the
book value: Debentures $12,000,000 5,000,000 Preferred Shares
Common Shares 10,000,000 Retained Earnings 15,000,000 TOTAL $
42,000,000 The debentures have a coupon rate of 11% and were issued
20 years ago with 15 years left to maturity. Current market yields
on a security of this risk level are 8%. Flotation costs would be
2.5% of the issue price. The preferred shares have a fixed dividend
rate of 9%, were issued at $40 per share and currently trade at $45
per share. A new issue would require a flotation cost of 4%. The
company has been enjoying a stable growth in the last 5 years with
its dividends growing from $0.80 per share to $1.18 per share that
was just paid. It is anticipated that the growth rate will continue
going forward. There are 5 million common shares currently
outstanding and are trading at $15 per share. New shares will be
issued at $15 per share also with flotation costs of 8%. Intemally
generated funds will have to be supplemented by new external
sources for the equity contribution to the new capital project. The
tax rate is 30%. The market value of debt is: $15,081,412
$17,491,025 $12,000,000 $8,789,432 The market value of Preferred:
$5,625,000 $7,391,825 $5,000,000 $6,526,321 The market value of
Common Stocks is: 10 FI Home Prtsen F8 Ens F3 F4 F5 F6 F7 % A &
2 3 4 5 7 8 9 The market value of Common Stocks is: $75,000,000
$46,800,000 $52,000,000 $64,000,000 The After-tax cost of debt is:
5.74% 6.21% 5.6% 4.31% The cost of preferred is: 8.33% 5.34% 8.91%
5.42% The cost of common equity is: 17.93% 16.34% 8.79%
21.25%