- This topic has 3 replies, 3 voices, and was last updated 2 years ago by
.
- Posts
QUESTION
TLC plc has the following capital structure:
$’000
Ordinary shares – $0.40 5,000
Retained earnings 500
10% Preference shares at $11,500
10% $100 redeemable debentures 3,000
Total funds employed 10,000The market price of the preference shares is 80cents ex-div, the ordinary shares are quoted at $1.62 cum-div per share. Debenture stock is quoted at $97.5 ex-interest per $100 nominal and will be redeemable at par in exactly 7 years’ time.
TLC plc has just declared dividend of $1,500,000 in total for all issued ordinary shares. The dividend growth rate is 4% per year forever. Company tax is 30% per year. The market rate of return is 12% and the company has an equity beta value of 1.25
Required:
a) Calculate WACC based on market values.
b) Discuss the implications of using a wrong WACC value in project appraisal and comment on the current level of capital gearingThere is no point in typing out a full question and expecting to be provided with a full answer.
You must have an answer in the same book in which you found the question, so ask about whatever it is you are not clear about in the answer and then I will explain.
If you have been given this as a test question and therefore do not have an answer, then everything needed to be able to answer it is covered in my free lectures for AFM (and for FM as well given that it is revision from Paper FM).
TLC plc has the following capital structure:
$’000
Ordinary shares – $0.40 5,000
Retained earnings 500
10% Preference shares at $11,500
10% $100 redeemable debentures 3,000
Total funds employed 10,000The market price of the preference shares is 80cents ex-div, the ordinary shares are quoted at $1.62 cum-div per share. Debenture stock is quoted at $97.5 ex-interest per $100 nominal and will be redeemable at par in exactly 7 years’ time.
TLC plc has just declared dividend of $1,500,000 in total for all issued ordinary shares. The dividend growth rate is 4% per year forever. Company tax is 30% per year. The market rate of return is 12% and the company has an equity beta value of 1.25
Required:
a) Calculate WACC based on market values.
b) Discuss the implications of using a wrong WACC value in project appraisal and comment on the current level of capital gearing
- The topic ‘Practice Question on WACC’ is closed to new replies.