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I am a bit stuck on this question:
Ingham plc’s capital structure is as follows:
$m
50c ordinary shares 12
8% $1 preference shares 6
12.5% loan notes 20X6 8
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26
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The loan notes are redeemable at nominal value in 20X6. The current market prices of the
company’s securities are as follows.
50c ordinary shares 250c
8% $1 preference shares 92c
12.5% loan notes 20X6 $100
The company is paying corporation tax at the rate of 30%. The cost of the company’s
ordinary equity capital has been estimated at 18% pa.
What is the company’s weighted average cost of capital for capital investment appraisal
purposes?Why are you attempting questions for which you do not have an answer? You should be using a Revision Kit from one of the ACCA approved publishers – they have answers and explanations.
The cost of equity is given as 18%, and the total market value is $12/0.50 x $2.50 = $60M
The cost of preference shares is 8/92 = 8.70% and the total market value is 6 x 0.92 = 5.52M
You would assume (because the question does not say anything else) that the loan notes are redeemed at par, and therefore the cost of the loan notes is 12.5 x 0.70 / 100 = 8.75% and the market value is $8M
Therefore the total market value = 60 + 5.52 + 8 = 73.52M
Therefore the WACC = (60/73.25 x 18) + (5.52/73.52 x 8.70) + (8/73.52 x 8.75)
Have you watched my free lectures on the calculation of the WACC? The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
(In future please ask in the Ask the Tutor Forum if you want for me to answer – this forum is for students to help each other 🙂 )
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Thanks John, I’ve passed all my exams watching lectures on open tuition for which I am thankful. The question is from Kaplan practice and revision kit. 🙂
I got confused because there was no timeline provided for redemption of debt.
This is helpful, thanks again.
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