In: Finance
You are provided with the following information for ABC
Book value structure
Recent market prices of all these securities are as follows
External financial opportunities are:
Dividends expected on equity shares at the end of year is $2 per share, anticipated growth rate in dividends is 7%,ABC Ltd pats all its earnings in the form of dividends. Corporate tax rate is 30%
Calculate
a] | Cost of equity capital = D1/(P0-f)+g, where, | ||||
D1 = Next expected dividend | |||||
P0 = Current share price | |||||
f = Flotation cost per share | |||||
g = Growth rate | |||||
Substituting available values, | |||||
Cost of equity capital = 2/(22-2)+0.07 = | 17.00% | ||||
b] | Cost of preference shares = YTM | ||||
YTM using an online calculator = 15% | 15.00% | ||||
c] | Before tax cost of debenture = YTM | ||||
YTM using an online calculator = 13.76% | |||||
After tax cost of debt = YTM*(1-t) = 13.76%*(1-30%) = | 9.63% | ||||
d] | Component | Book Value | Weight | Component Cost | WACC |
Debt | $ 80,00,000 | 40.00% | 9.63% | 3.85% | |
Preference stock | $ 20,00,000 | 10.00% | 15.00% | 1.50% | |
Ordinary shares | $ 1,00,00,000 | 50.00% | 17.00% | 8.50% | |
Total | $ 2,00,00,000 | 13.85% | |||
WACC based on book values | 13.85% | ||||
e] | Component | Market Value | Weight | Component Cost | WACC |
Debt [8000000*110/100] | $ 88,00,000 | 26.51% | 9.63% | 2.55% | |
Preference stock [2000000*120/100] | $ 24,00,000 | 7.23% | 15.00% | 1.08% | |
Ordinary shares [10000000*22/10] | $ 2,20,00,000 | 66.27% | 17.00% | 11.27% | |
Total | $ 3,32,00,000 | 14.90% | |||
WACC based on market values | 14.90% |