Question

Cost of Capital​​​​​​​​

Berap plc is financed by 7m $1 Ordinary Shares and $8m 8% Redeemable Debentures. Market Values are $1.20 Ex Dividend and 90% Ex Interest.

Apart from above Company has a Bank Loan of $2m at 8% and $1 Preference Shares of $1m with 12 p per share agreed dividend.

Company also has 3m Irredeemable Debentures at 12%.

An Ordinary Dividend of 10p has just been paid and future ordinary dividends expect to grow by 5%. Debentures are Redeemable in 5 Years’ time.

Requirement

i) Calculate the Capital Structure of the Company​

ii) Calculate the WACC of the Company

Answer 1

Component	Amount (in $)	Percentage of each component (%)	Cost	Weighted averge rate (in %)
Equity	7,000,000.00	33.33	8.75%	2.92
Preference Shares	1,000,000.00	4.76	12%	0.57
Bank Loan	2,000,000.00	9.52	8%	0.76
Redeemable Debentures	8,000,000.00	38.10	8.89%	3.39
Irredeemable Debentures	3,000,000.00	14.29	12%	1.71
	21,000,000.00	100.00		9.35

Working Notes:

Calculation of cost of each component:

a. Preference Shares = Dividend/Market Value*100

=0.12/1*100

=12%

b. Irredeemable Debentures = 12%

c. Bank Loan = 8%

d. Redeemable Debentures = Interest/Price of Debenture*100 (Ex-Interest) (Assuming Face value per debenture is $100)

=8%*100/100*90% *100

=8/90*100

   =8.89%

e. Equity(using gordan growth model)  = Expected Dividend/Current Market Price + Growth

=0.1(1.05)/1.2 + 5%

=8.75%