Question

There are 5 million ordinary shares. The beta of the shares is 0.6, the risk-free rate is 2% pa and the return on the market is 10% pa. The shares last traded at $10.00 per share.
An overdraft of $15 million attracts an interest rate of 6% pa compounded monthly.
Bonds exist with a total face value of $30m, a market value of $30m, a coupon of 5% pa paid semi-annually and 10 years to maturity.
The company accounts show $4m in retained earnings and $3m in trade credit (accounts payable).
Perpetual Preference shares exist which pay an annual a dividend of $0.30 and are currently trading at $3.20. There are 5m of these preference shares on issue.
The corporate tax rate is 30%.
Calculate the Weighted Average Cost of Capital on an after-tax basis. Explain and defend your treatment of Retained Earnings and Trade Credit

Answer 1

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