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Ingham plc’s capital structure is as follows:
$m
50c ordinary shares 12
8% $1 preference shares 6
12.5% loan notes 20X6 8
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26
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The loan notes are redeemable at nominal value in 20X6. The current market prices of the
company’s securities are as follows.
50c ordinary shares 250c
8% $1 preference shares 92c
12.5% loan notes 20X6 $100
The company is paying corporation tax at the rate of 30%. The cost of the company’s
ordinary equity capital has been estimated at 18% pa.
What is the company’s weighted average cost of capital for capital investment appraisal
purposes?there is not information on which number of year 20×6 is, and the question is treated like irredeemable loan. i dont know why.
thanksIt is because the loan notes have a current market value of par (nominal value) and will be redeemed at par (nominal value).
If the current market value and the redemption amount are the same, then the cost of debt can be calculated as though it were irredeemable.
That is very unusual in the exam – almost always the current market value and the amount on redemption will be different, and then you have no choice but to calculate the IRR.
(Try it yourself with this example – pick any number of years you want and calculate the IRR and you will find that it is the same as calculating as though it is irredeemable 🙂 )
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