tax weighted average cost

This scenario relates to three requirements.

Tavernor Co has the following capital structure:

Note. $m

Ordinary shares. 1 500

Reserves 300

Preference shares. 2 200

Redeemable loan notes. 3 600

Total capital employed. 1600

Notes:

(1) Ordinary shares, nominal value $0.50 per share, market price $2.40 per share, equity beta of 1.3.

(2) 5% preference shares, nominal value $1.00 per share, market price $0.65 per Share

(3) 4% secured loan notes, redeemable at nominal value of $100 in five years’ time market price $102.

(4) Tavernor Co pays corporation tax at 25% per year

(5) The risk-free rate of return is 2%.

(6) The equity risk premium is 6%.

The company is planning an expansion of business and it has asked for your advice on using either lease finance from a conventional bank or Islamic finance

Calculate the after tax weighted average cost of tavernor