Cost of capital

Questions for Seminar 4

1.         In October of 2011 when Carlsberg were proposing to take over Scottish and Newcastle they planned to raise 2.8bn GBP through a rights issue.  Critically analyse a rights issue and three other methods that a company can use to issue additional shares to raise finance.

2.         Jackdaw Plc has an issued share capital of 1 million ordinary shares (nominal value £1 each); it has also issued £800,000 of 8% bonds.  The market price of ordinary shares is £4.76 per share and bonds are priced at 69%.  Dividends and interest are payable annually and have both been paid recently.  Bonds are redeemable at par in ten years time.

Total dividend payment over the last few years has been:

2006               £200,000

2007               £230,000

2008               £230,000

2009               £260,000

2010               £300,000

 

Jackdaw Plc currently pays Corporation Tax at 30%.

Required:

a)         Estimate the cost of capital which Jackdaw Plc should use as a discount rate for purposes of investment appraisal.

b)         Discuss any difficulties and uncertainties in your estimation.

 

 

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