Question

M and M Ltd has the following long term capital outstanding as at 31 May 201

1. 10% debenture stock with face vale of $500 000.The debentures were issued in 2010 and are currently trading at$950 per $1000 face value
2. Preference shares with face value of $400 000 and annual dividend of $6 per share.They are currently selling for $60 per share
3. Sixty thousand ordinary shares of $10 par value .The shares are currently selling at $50 per share.The dividend per share for the past several yers are as follows;

Year	Dividend per Share ($)
2011	2,00
2012	2,16
2013	2,37
2014	2,60
2015	2,80
2016	3,08
2017	3,38
2018	3,70

Required

Assuming a tax rate of 35% compute the firm’s Weighted Average Cost of Capital (WACC)

Answer 1

	M & M Ltd
1	Debenture cost calculation
	Face value of debentures	1,000
	Total debenture face value	500,000
	No of Debentures issued	500
	Market Value of Debentures	950
	Annual interest amount per denture @10% =	100
	Cost of Debenture =Interest /Market value=100/950=	10.53%
	Tax Rate =35%
	Post Tax cost of debenture =10.53% *(1-35%)=	6.84%
	Total market Value of debentures	475,000

2	Cost of Preference share Calc
	Preference share face value	400,000
	Assuming Par value of each Pref share =	100
	No of Pref shares issued=	4,000
	Market Value of each Pref share	60
	Annual dividend per Pref share =	6
	Cost of Pref share =6/60=	10.00%
	Total Market Value of Pref Shares	240,000

3	Cost of Equity Calc
Year	Dividend /share	Div Growth	Div Growth rate
2011	2
2012	2.16	0.16	8.0%
2013	2.37	0.21	9.7%
2014	2.6	0.23	9.7%
2015	2.8	0.20	7.7%
2016	3.08	0.28	10.0%
2017	3.38	0.30	9.7%
2018	3.7	0.32	9.5%

	Average Dividend Growth rate =9.2%
	Market Price per share now =P0=50
	Last dividend paid =3.7
	Average dividend growth rate =9.2%
	Assume cost of equity =Ke
	So Ke =d0(1+g)/P0 +g
	Ke= 3.7*(1.092)/50 +9.2%
	Ke =17.28%
	So cost of Equity =17.28%
	Total no of shares issued =	10,000
	Market Price /share	50
	Market value of shares=	500,000

4	WACC calculation
	Capital Type	Market Value	Weight of market value	Post Tax cost	Weighted cost
	Debenture	475,000	39.1%	6.84%	2.67%
	Preference share	240,000	19.8%	10.00%	1.98%
	Equity	500,000	41.2%	17.28%	7.11%
	Total	1,215,000	100.0%		11.76%

So WACC of M&M =11.76%