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A company’s capital structure is as follows.
£m
20m 50p ordinary shares 10
Reserves 4
13% loan stock 20X4 7
Total 21
The loan stock is redeemable at par in 20X4. Current market prices for the company’s securities are: 50p ordinary shares, 280p; 13% loan stock 20X4, 100.The company is paying corporation tax at a rate of 28%.
The cost of the company’s equity capital has been estimated as 12% pa.
What is the company’s per annum weighted average cost of capital for investment appraisal purposes?
a 12.1%
b 11.7%
c 11.1%
d 8.5%Answer – B
I found out the Ke = 12% and the Kd = Coupon rate (1-T) = 13 (1-0.28) = 9.36%. Hereafter, I need your help to get it solve.
Kd is only equal to 9.36% because the market value and the redemption are both 100 – if not you would obviously have to calculate the IRR.
You then get the WACC by weighting the cost of equity and the cost of debt by the total market values of the equity and debt.
You must watch the free lectures – I am certainly not going to type them all out here.
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