MN10311 seminars questions to revise for exams: WACC ordin pref irre loan

Cost of capital
Stanley
The company has £200,000 of ordinary capital with a nominal value of 25p and
£50,000 of 9% preference shares with a par value of £1. The company also has
£300,000 of 11% bonds redeemable in 5 years and £500,000 of irredeemable
10% bonds both with nominal value of £100. There are £400,000 bank loans on
which the company pays 12% interest. The current dividend to be paid shortly is
30p per share. Dividends are expected to grow by 3% per annum. Corporation
tax is 30%.

Market values as at 31 December (ex-dividend or ex-interest) are

Ordinary shares £3.50
Preference shares £1.50
11% Bonds £90
10% Irredeemable Debt £70

Required:
Calculate the Weighted Average Cost of Capital for the company.



ANSWER

Stanley

Nature of finance Book Par Number Market value Total MV
value value (all ex-div or (£000s)
ex-int)
Ordinary 200000 25p 800000 3.50 2800
9% Preference 50000 £1 50000 1.50 75
11% Redeemable 300000 £100 3000 90.00 270
10% Irredeemable 500000 £100 5000 70.00 350
12% Bank loan 400000 400
3895

Ke = {Do (1+g) / Po} + g

Do = 30p = 0.3
P0 = 3.50 = 3.5
g = 3% = 0.03

Ke = {(0.30 * 1.03) / 3.5} + 0.03 = 0.1183 = 11.8%

Kpref = D/P = 0.09/1.50 = 0.06 = 6%