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Dear John,
Could you please help me on this question.
Leto plc has 10 million $1•00 ordinary shares in issue that have a current market value of $2•00 per share. The company also has irredeemable loan capital in issue with a nominal value of $20 million that is quoted at $150 per $100 nominal value. The cost of ordinary shares is estimated at 15% and the rate of interest on the loan capital is 12%. The rate of corporation tax is 25%. What is the weighted average cost of capital for the company?
I read the solution of this question and the solution present the way to calculate cost of debt as follows:
Cost of loan capital = 12% * (1-25%) = 9%
However, I think that cost of loan capital should be 12% * 100/150 * (1-25%) as I determine 150 as Po.
Could you please explain me on this respect?
I don’t know where you found this question, but assuming that you have copied it correctly then it is terribly badly worded.
If, as would normally be the case, the 12% is the coupon rate (i.e. the interest on nominal) then the answer is wrong and should be as you have typed.
If, on the other hand, the 12% is the actual return to investors (which would be unlikely on this wording) then the printed answer would be correct.
@johnmoffat said:
I don’t know where you found this question, but assuming that you have copied it correctly then it is terribly badly worded.If, as would normally be the case, the 12% is the coupon rate (i.e. the interest on nominal) then the answer is wrong and should be as you have typed.
If, on the other hand, the 12% is the actual return to investors (which would be unlikely on this wording) then the printed answer would be correct.
Thank John for your assistance
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