Discount factor- Section C- FM March 2022 paper- Tanza Co

Hi John hope you are well.

This question is driving me nuts as I was confident with the question until I needed the % discount factor to calculate the cost of debt.

Copied and pasted the below Section C question 2- Tanza Co- March 2022 paper.

I cannot seem to understand where they got the 10% DF from, and the answers/ examiners report doesn’t state how they got 10%. Would you mind helping me out please?

Thank you in advance.
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Tanza Co currently has the following sources of finance at 31 December 20X6. The capital structure and its nominal values have not changed for many years:

Nominal value

$m

Ordinary shares

50

6% convertible loan notes

150

4% bank loan

120

The ordinary shares are currently trading at $5.55 per share and have a nominal value of $0.50 per share. An ordinary dividend of $0.85 per share has recently been paid. The directors have indicated that a dividend of $0.90 will be paid on 31 December 20X7. Tanza Co’s dividends and share price have grown steadily at 6% per year for several years and are expected to continue to do so.

Each loan note has a nominal value of $100 and is currently trading at $108.51. On 31 December 20X9, the investors holding the convertible loan notes may convert the loan notes into 20 ordinary shares. If they choose not to do so, the loan notes will be redeemed at nominal value on 31 December 20X9.

Tanza Co pays corporation tax at a rate of 15%.

Tanza Co needs to raise a further $200m of long-term finance and the directors have been discussing whether this should be borrowed (debt) or raised by issuing new share capital (equity). The finance is needed quickly for a new project.

During the discussion, Director A proposed the use of debt. She had heard that at high levels of gearing the company can make cost savings which improve the weighted average cost of capital.

Director B has pointed out that Tanza Co’s capital gearing is amongst the lowest in the industry. ‘Our competitors generally have higher gearing than we do and also have lower weighted average costs of capital (WACCs) than us. Although I do think when gearing gets high the WACC goes up again.’