Problem
Creativity is at the heart of every dream. Every idea, every groundbreaking leap that changes our world starts with the vision of talented creators. DJI, is a company that gives creators the tools they need to bring their ideas to life.
DJI has in issue $108 million ordinary shares with a nominal value of $1 each. Currently, the market price of a share is at $6.70 per share and the dividend has just been paid. The average annual dividend growth rate is at 5% and the next year's dividend per share is expected to be 25 cents.
The company has also issued 10% bonds with a face value of $100 to raise total debt capital equal to $194 million. These bonds are redeemable in 10 years at par and currently, these bonds are trading in the market for a price of $122 per bond.
The finance manager of DJI has identified three possible investment projects, but the company only has access to a total of $3.7 million. The projects are not divisible and may not be postponed until a future period. The annual tax rate is 30%, and it is paid one year in arrears.
Task
• Calculate the cost of debt, cost of equity, debt to equity ratio based on market values, the weighted average cost of capital and project-specific cost of equity.