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ABC capital structure is as follows
50c ordinary shares = 12 Million
8% $1 preference shares = 6 Million
12.5% loan notes 2006 = 8 MillionThe loan notes are redeemable at nominal value in 2006. The current market prices of the companys securities are as follows
50c ordinay shares = 250c
8% $1 preference shares =92c
12.5% loan notes = $100The company is paying corporation tax at the rate of 30%. The cost of the company ordinary equity capital has been estimated at 18% pa.
What is the company WACC for capital investment appraisal.
Answer
K=0.18*(24.2.50)+(8/92)*6*0.92)+0.125*(1-0.30)/ 24* 2.50+6*0.92+8 = 16.29
Sir, i did not understand this answer. I have tried to calculate WACC separating cost of debt and cost of equity but i got different answer. There is no easy way to understand this exercise?
Th
I don’t know where you went wrong, but the answer is as follows:
Equity: Cost is 18% (from the question); Total market value = 12/0.5 = 24M shares x $2.50 = $60M
Preference: Cost is 8/92 = 8.70%; total MV = 6M x 0.92 = $5.52M
Loan notes: They are redeemable at the nominal value, which is also the current market value, and therefore the after-tax cost is 12.5% x (1 – 0.3) = 8.75%. The total MV is $8M
The total MV of everything is therefore 60 + 5.52 + 8 = $73.52M
Therefore the WACC = (60/73.52 x 18%) + (5.52/73.52 x 8.7%) + (8/73.52 x 8.75%) = 16.29%
Have you watched my free lectures on this? The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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