Question

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

1. Calculate the Capital Structure of the Company  
2. Calculate the WACC of the Company                              

Answer 1

WACC:

Use only components of financing that are long term - hence to consider the irredemable debenture, preferred stock and ordinary shares.

Assume a marginal tax rate of 30%:

Cost of Debt - 12(1-0.3) = 8.4% - Irredeemable debenture

Cost of Preference Shares Dp/Ps = 12% - (given in the above data as 12p per share of $1)

Cost of equity = Ks = D1/P0 +g - Gordon model - dividend pattern is assumed to be stable and growing at 5%.

Most recent dividend - Do = $0.1, D1 = Do(1+g)

Market price of share= $1.2

Cost of equity = 0.1(1+.05)/1.2 + 0.05 = 0.1375 = 13.75%

Debt size = $3 million

Preferred Share = $ 1 million

Equity = $ 7 million

Total capital = $ million (3+1+7) = 11 million dolars

WACC = wdkd(1-T) + wpkp + ws.ks

             = (3/11)*0.084 + (1/11)*0.12 + (7/11)*0.1375 = 0.122 or 12.2%