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T PLC is a stock market listed company and wishes to calculate weighted average cost of capital on market value basis .The following information relates to company:
Ordinary shares
30m
4%Preference shares
16m
6% irredeemable debt
5m
3% bank loan
3mThe company has heard about capital asset pricing model which is best use to cover the systematic risk and has decided to calculate cost of equity using this.The risk free return is 5.7% and equity risk premium is 7.9%The equity and debt beta of T PLC is 1.5 and 1.4.The market value of equity is $3.25 and market value of bonds and preference share is $132/bond and $2.1.The company pays a corporation tax of 30%.
(a) Calculate the cost of equity,using capital asset pricing model?
(b) What is weighted average cost of capital of T PLC?there is no problem in calculating Ke by CAPM formula but in question b WACC of TPLC is asked I calculated:
Ke=rf+risk premium*Be
(3.25/3.25+132)*17.55+(132/3.25+132)*84% {kd=6/5*(1-.3)=84%} is the kd I calculated is correct? and don’t we have to include preference share as its information is given?
question has said MV of bond is 132 does it only includes irredeemable debt or bank loan, I guess bank loan is non tradeable. Please make it clear I’m confused.
as we know that wacc is the weighted average cost of equity and debt, since bank loan is non tradeable, from the viewpoint of company don’t we have to include it in WACC if the information was given including bank loan?
The WACC is the weighted average of all four sources of long-term finance.
I don’t understand your workings for Kd at all.
Ke = 5.7% + (1.5 x 7.9%) = 17.55%
Cost of preference shares = 0.04/2.10 = 1.90%
Cost of debt = (6 x 0.7) / 132 = 3.18%
Cost of bank loan = 3 x 0.7 = 2.1%
The MV of the bond only applies to the irredeemable debt. The market value of the loan is $3M
Why are you attempting questions for which you do not have a printed answer? You should be using a Revision Kit from one of the ACCA approved publishers (they contain answers and workings).
Also, why have you not watched my free lectures? They are a complete course for Paper F9 and all of this is covered in full in the lectures.
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