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ABC. has 1,000,000 ordinary shares of nominal value 20p per share. The market value of shares is 76p per share. The dividends per share (net) for the last six years are:
1998 1999 2010 2011 2012 2013
5p 6p 6p 7p 8p 8pThe company also has £800,000 of redeemable debentures with a market price of £95 per £100 block. These debentures were issued at a coupon rate of 8% and are redeemable in the year 2018. Peptle pays corporation tax at 35%. Today is January 2014.
Required: Calculate the weighted average cost of capital (WACC) for ABC.
You need to calculate the cost of equity, and the cost of debt, and then calculate the WACC using the total market values of equity and debt as weightings.
For cost of equity, you calculate the average growth rate and then use the formula.
For cost of debt you calculate the internal rate of return of the after-tax flows.All of the above calculations are explained in detail in my free lectures on here on cost of equity; cost of debt; and WACC.
It is a very standard calculation and almost always gets asked for in the exam.thanks but because Im very new to this site can you please advise me where can i get your free lecture notes?
If you follow this link:
https://opentuition.com/acca/f9/then you will get links to all the free resources available for Paper F9.
The Course Notes are to be used in conjunction with the free lectures.growth=5(1+g) to the power 6=8
1+g=1.0815
There g=0.0815=8.15%Cost of Equity=r(e)=D(1+g)/P + g=0.1937=19.37%
Cost of Debt=IRR: 6.7982%
WACC
Equity 19.37% 19.37*0.5=9.685%
Debt 6.80% 6.80*0.5=3.400%
Total 13.085%
Assumption: (1)Level gearing remains the same for subsequent project
(2)Project has same risk i.e. level of risk does not change.Ok? Happy?
Not quite 🙂
There are 5 years growth in dividends (not 6).
So 5 x (1+g)^5 = 8; therefore g = 0.0986 or 9.86%So cost of equity = 8(1.0986)/76 + 0.0986 = 0.2142 or 21.42%
The rest of your answer is OK (except that obviously the WACC will be slightly different) 🙂
8(1-.35) *760000=3952*3.53=139487 (5.2%@4y=3.53)
80000* .816=653171 …………………….irr=6.47………
r8 or wrong?????
You need to first have calculated the net present value at two different rates of interest.Ideal ly, the two rates should give net present values around zero to get the most accurate result.Optimal result would be best if one is negative and close to zero and one is positive.Then input values into following equation-
L + [Nl/(Nl-Nh) x (H-L)]
Where L is lower interest rate used in calculating the net present value at lower rate.
H is higher interest rate used in calculating net present value at higher interest rate.
Nl is monetary value of net present value calculated using lower interest rate.
Nh is monetary value of net present value calculated using higher interest rate.
If you have any issues with what I have said don’t hesitate to ask.
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