Question

In: Accounting

The following information has been taken from the statement of financial position of Cos plc (Cos),...

The following information has been taken from the statement of financial position of Cos plc (Cos), a HK listed company:

	HK$ m
Equity and Reserves
Ordinary shares	15
Reserves	29
	44
6% preference shares	6
	50
Non-current Liabilities
4% Redeemable Bonds	18
Current Liabilities
Trade and other creditors	12

Total Equity and liabilities	80

The ordinary shares of Cos have a nominal value of HK$5 per share and a current market price of HK$31 per share.

The 6% preference shares of Cos have a nominal value of HK$10 per share and a current market price of HK$12 per share.

The bonds have a nominal value of HK$1000 and a current market price of HK$1035. They were issued seven years ago at a low coupon rate of 4% and are redeemable in three years’ time at a 10% premium to the nominal value.

The risk-free rate of return is 3.5% per annum and the equity risk premium is 6.8% per annum. Cos has an equity beta of 1.25.

Cos pays corporation tax at a rate of 20% per annum.

Required:

Calculate the after-tax Weighted Average cost of Capital (WACC) of Cos. You must state all assumptions and show all workings

From a theoretical basis discuss when it would be correct to use the WACC in appraising future projects.

Describe the key features of any two of the sources of long-term finance used by Cos.

Expert Solution

This question belongs to the Concept of Capital Financing & Cost of Capital of Financial Management.

C). Sources of long term finance used by the company in the given question are:

Equity
Bonds/Debentures

key features

Share are isseud to raise capital by sharing a part of ownership of the company. While Bonds holders are the lenders to the company they do not enjoy any ownership of the company.
Bonds carry a fixed interest rate which does not relate with the profitablity of the company while Equity shareholders get dividend when company distributes the same,
in case of Loquidation, Bons holder are paid first, Equity shareholders are paid after paying all the outside liablities, Bons holder and preference shareholders.

ekkarill92 answered 1 year ago

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