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  3. 17. dhofar international is financed through bonds

17. Dhofar International is financed through bonds and ordinary shares. The bonds were issued five...

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Accounting

17. Dhofar International is financed through bonds and ordinary shares. The bonds were issued

five years ago at a par value of OMR100 (total funds raised OMR 6 million). They carry an annual

coupon of 11 per cent, are due to be redeemed in four years and are currently trading at OMR110.

The companys shares have a market value of OMR 5 million, the return on risk-free government securities is 8 percent and the risk premium for an average-risk share has been 6%. Dhofar International shares have a lower than average risk and its historic beta as measured by the co-movement of its shares and the market index correctly reflects the risk adjustment necessary to the average risk premium this is 0.80. The corporate tax rate is 35%. Dhofar International has a net asset figure of OMR 4.5m showing in its balance sheet.

Required

a). Calculate the cost of debt capital. (Try 7% and 8%) (2.5 marks)

b). Calculate the cost of equity capital. (1 mark)

c). Calculate the weighted average cost of capital. (1.5 marks

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