50c ordinary shares $12m
8% $1 preference share $6
12.5% loan notes 20X6 $8
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The loan notes are redeemable at nominal in 20X6. The current market value of securities are;
50c O.S. 250c
8% $1 preference share 92c
12.5% loan notes. $100
RATE OF TAX 30%
I tried to solve it and took awfully half an hour but couldn't get the right answer :(
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If Cost of equity p.a. is 18% What is the cost of debt and what is the WACC?
6y ago#1Surely there are workings for the answer in the same book in which you found the question (you should be using a Revision Kit from one of the ACCA approved publishers - BPP or Kaplan)?
The cost of equity is 18% and the cost of preference shares is 8/92 = 8.7%.
The cost of debt is 12.5 x 0.7 = 8.75% (usually we would calculate the IRR because the debt is redeemable, but since the redemption amount is the same as the current market value, we do not need to).
The MV's of each source are:
Equity 12/0.5 x $2.50 = $60m
Preference = 6 x $0.92 = $5.52m
Debt = $8m
The WACC is the weighted average, weighted by the total MV's, and is therefore 16.29%
Have you watched my free lectures on this? The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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