Question

The capital structure of Minelli Enterprises Limited as at 31 March 2020 is as follows:

-Ordinary shares (par value $1.50) 60,000

5.5% (post-tax) Preference Shares (par value $2.20) 8,800

6.5% (pre-tax) Bonds semi-annual (par value $1000)

80,000 Term Loan (interest rate 4.25% per annum) 6,500

Additional Information:

• The ordinary shares are currently trading at $1.95 while the preference shares are trading at $2.45.

• Return on government bonds is 1.25%, the market risk premium 4.25%. A consultant has estimated the company to have a beta of 1.30.

• The company tax rate is 28%

• The bonds initially had a 5-year term to maturity and were issued exactly three years ago and would be redeemed at par.

• The current market value of the bond is $ 955.

2.1 Bond ratings are susceptible to the COVID-19 pandemic. Discuss.

2.2 Calculate the post-tax weighted average cost of capital (WACC) for Minelli Enterprises Ltd using the market valuation approach (show all workings).

Answer 1