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Proton Ltd. has the following capital structure:
Ordinary shares: 1,000,000 ordinary shares of nominal value 20p per share. The market value of shares is 50p per share. The dividends per share (net) for the last five years are shown below.
1994 1995 1996 1997 1998
6p 6p 7p 8p 8pDebentures: £800,000 of redeemable debentures with a market price of £90 per £100 block. These debentures were issued at a coupon rate of 10% and are redeemable in the year 2002.
Proton pays corporation tax at 35%.
Required:
a) Calculate the weighted average cost of capital (WACC) for Proton Ltd.
(13 Marks)b) Outline any possible difficulties that might be experienced when trying to calculate WACC. (12 Marks)
Total Marks: 25
The cost of Debt can be calculated using the IRR interpolation. Assuming Mohammed is rite on the assumption that the debentures were issued in 1994. I disagree coz that last five years refers to the dividend payout over the last five years. They could have been issued anytime.
Finding the PV of the CFs, first using discount rate of 12%. The CFs being Market Value 90, Interest 5.85 (9-(1-0.35) and the Redemption value of 100, gave a NPV of (20.54). And using a discount rate of 6% on the same CFs I got a NPV of 5.35.
Substituting these in the IRR formula: 6%+ ((5.35/(5.35+(20.54))*(12%-6%) = 7.2%.
Now you can apply the respective weights of equity and debt capital to the calculated costs to get the WACC.
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