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Cost of capital

This topic has 1 reply, 2 voices, and was last updated 8 years ago by John Moffat.

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August 17, 2016 at 12:22 pm #333768
Anuja Nair
Member
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Hi sir, how do i work out the following question below. The par value of the loan notes is not given.
Qn ) Gobi Co has irredeemable 4% loan notes in issue with a nominal value of $20million. The current market value of the loan notes is $10million and the tax rate is 25% . The equity shares of Gobi Co have a total market capitalisation of $30million. The company’s weighted average cost of capital is 10%.
What is the cost of equity ?
Answer: 11.3%
August 17, 2016 at 3:08 pm #333782
John Moffat
Keymaster
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The nominal value is another word for par value.
You can calculate the cost of debt ( (20 x 4% x 0.75) / 10 = 6%
So the WACC = (10/40 x 6%) + (30/40 x Ke) = 10%
So now you can calculate Ke 🙂
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