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Hello John,
A firm has a bank loan with a 10% interest rate. The firm also has in issue 8% preference
shares trading at nominal value and has estimated that its cost of ordinary shares is 18%. The
firm has a 30% tax rate.
What is the weighted average cost of capital if the firm uses a capital structure
comprising 50% debt and an even split between preference and ordinary shares?
A 11.50%
B 10.00%
C 9.40%
D 8.05%1. The answer is B.
2. In the answers, for preference shares, 8% was used as the cost of the preference share.
– How come 8% was used? Isn’t 8% the rate of dividend.Thanks
8% is the coupon rate which is the rate of interest on the nominal value.
The cost of the preference shares is the interest / market value. The question says that the current market value is equal to the nominal value!
Hello Sir, If we have debt of 10% loan notes 20X9, the Book and Market values of it are $80m and $90m. What will be the book and market value/loan note?
In future, please start a new thread when you are asking about a different topic. Your question has nothing directly to do with the WACC.
You have typed the book value and the market value in your question!!!
If you are wanting the values for each loan note (which is a strange thing to want), then assuming the nominal/book value of each loan note is $100 (which is normally the case, but does not have to be) then the market value of each loan note is $112.50 (90/80 x $100)
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