Apel Investment Company has GH1,800,000 of interest-bearing bond outstanding. The
outstanding bonds have a 11% coupon and a 14% yield to maturity. Management believes
they could issue new bonds at a premium of 105% that would provide a similar yield to
maturity. Also, the companys prepared stock currently stands at GH1,200,000 and trades
at GH60.00 per share. The company pays a dividend of GH3.00 per share. Furthermore,
the companys common stock sells for GH15.00 per share with 200,000 shares in issue.
The company has a beta of 1.2, whiles the governments T-Bill has an interest rate of 12%,
with a 18% average return on the market. The companys marginal tax rate is 40%.
Management is considering investing in a new project, the details of which are as follows:
GH
Project cost 2,000,000.00
Estimated net profit:
Year 1
(22,000.00)
Year 2 192,000.00
Year 3 300,000.00
Year 4 270,000.00
Year 5 180,000.00
Additional information;
Depreciation is based on the straight line method.
The estimated residual value of the project at the end of its useful life is
GH400,000.
From the above information, you are required to calculate,
a. after tax cost of debt
(4 marks)
b. cost of preferred stock
(4 marks)
c. cost of equity using the capital asset pricing model
(4 marks)
d. weight average cost of capital
(4 marks)
e. Using the net present value method, assess the viability of the proposed project (10
marks)
f. Time value of money is the observation that, it is better to receive money sooner than
later. Explain two (2) reasons why a cedi today is worth more than a cedi sometime in
the future.
