[raylene]

Value(equity) = 30m x (10 x11) = £33m i’m not sure about this.

Kp = 8 / 80 = 10% i’m not sure about this. Why is /80? I think it is 88p

And i not sure all the Kd of 5% debenture..
Kd (5% debenture)

Interest net of tax = 5 x 0.67 = £3.35
90 = 3.35 x (1+r)-1 + 3.35 x (1+r)-2 + 3.35 x (1+r)-3 + 108.35 x (1+r)-4

Try r = 7%, gives price as £91.45
Try r = 8%, gives price as £88.27

Therefore r is approx. 7.46%, to give price of £90

Hence Kd (5% debenture) = 7.46%

[raylene]

SUGGESTED SOLUTION
Value(equity) = 30m x (10 x11) = £33m
Value(5% debenture) = 5.5m x 90/100 = £4.95m
Value(9% debenture) = 7m x 71/100 = £4.97m
Value(preference shares)= 2m x 0.8 = £1.6m
Value(bank loan) = £4m

Total value = £48.52m

Ke = (D1 / P) + g
Dividend = 1,360,000 – (8% x 2,000,000) = £1,200,000
Per share = 1,200,000 / 30,000,000 = 4p/share
Ke = (4 x 1.1 / 110) + 0.1 = 0.14 or 14%
Kp = 8 / 80 = 10%

Kd (Bank) = 6.5% x (1-t) = 6.5% x 0.67 = 4.4% (approx.)

Kd (9% debenture) = 9 x 0.67 / 71 = 8.5%

Kd (5% debenture)

Interest net of tax = 5 x 0.67 = £3.35
90 = 3.35 x (1+r)-1 + 3.35 x (1+r)-2 + 3.35 x (1+r)-3 + 108.35 x (1+r)-4

Try r = 7%, gives price as £91.45
Try r = 8%, gives price as £88.27

Therefore r is approx. 7.46%, to give price of £90

Hence Kd (5% debenture) = 7.46%

WACC = (14% x 33 + 7.46% x 4.95 + 8.5% x 4.97 + 10% x 1.6 + 4.4% x 4) / 48.52

WACC = 11.8%

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