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(a) Mining and Purification Company has the following details on its shares • $20 million shares...

(a) Mining and Purification Company has the following details on its shares • $20 million shares each with a value of $32, whose cost is 8. % • $40 million of 5% bonds with a market value of $101.00, after-tax cost of 3.5%. • A bank loan of $8 million whose after-tax cost is 6.2%. • $2 million 8% preference shares of $2 whose market price is $3.33 per share and whose cost is 6%. Calculate the WACC [10 Marks]

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WACC according to Market Value Weight

Source of fund Market Value (millions) Market Value Weignt Cost WACC
Equity $       64.00 0.5530 8% 4.42%
Bond $       40.40 0.3491 3.50% 1.22%
Loan $          8.00 0.0691 6.20% 0.43%
Preference Shares $          3.33 0.0288 6% 0.17%
$     115.73 1.00 6.25%

WACC according to Book Value weights

Source of fund Book Value(millions) Book Value Weignt Cost WACC
Equity $       20.00 0.2857 8% 2.29%
Bond $       40.00 0.5714 3.50% 2.00%
Loan $          8.00 0.1143 6.20% 0.71%
Preference Shares $          2.00 0.0286 6% 0.17%
$       70.00 1.00 5.17%
1/A B C D E F
2 Source of fund Market Value (millions) Market Value Weignt Cost WACC
3 Equity =20/10*32 =+C3/C7 0.08 =+D3*E3
4 Bond =40/100*101 =+C4/C7 0.035 =+D4*E4
5 Loan 8 =+C5/C7 0.062 =+D5*E5
6 Preference Shares =2/2*3.33 =+C6/C7 0.06 =+D6*E6
7 =SUM(C3:C6) =SUM(D3:D6) =SUM(F3:F6)
8
9
10 Source of fund Book Value(millions) Book Value Weignt Cost WACC
11 Equity 20 =+C11/C15 0.08 =+D11*E11
12 Bond 40 =+C12/C15 0.035 =+D12*E12
13 Loan 8 =+C13/C15 0.062 =+D13*E13
14 Preference Shares 2 =+C14/C15 0.06 =+D14*E14
15 =SUM(C11:C14) =SUM(D11:D14) =SUM(F11:F14)

jeff jeffy answered 1 year ago
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