Calculate the weighted average cost of capital of Riphean plc and Silurian plc using the information provided.(b)Discuss two possible reasons why the cost of ordinary share capital differs between the two businesses. 8.1 Riphean plc and Silurian plc are two businesses operating in different industries. They are both financed by a mixture of ordinary share and loan capital and both are seeking to derivethe cost of capital for investment decision-making purposes. The following information is available concerning the two businesses for the year to 30 November Year 8:Riphean plcSilurian plcProfit for the year£3.0m£4.0mDividends£1.5m£2.0mMarket value per ordinary share£4.00£1.60Number of ordinary sharesGross interest yield on loan capital5m10m8%12%Market value of loan capital£10m£16mThe annual growth rate in dividends is 5 per cent for Riphean plc and 8 per cent for Silurian plc. Assume a 30 per cent tax rate.

solution : calculation of weighted average cost of capital of Riphean plc and Silurian plc…

Calculate the weighted average cost of capital of Riphean plc and Silurian plc using the information provided. (b)Discuss two possible reasons why the cost of ordinary share capital differs between the two businesses.

Calculate the weighted average cost of capital of Riphean plc and Silurian plc using the information provided. (b)Discuss two possible reasons why the cost of ordinary share capital differs between the two businesses.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Calculate the weighted average cost of capital of Riphean plc and Silurian plc using the information provided.
(b)Discuss two possible reasons why the cost of ordinary share capital differs between the two businesses.

8.1 Riphean plc and Silurian plc are two businesses operating in different industries. They are both financed by a mixture of ordinary share and loan capital and both are seeking to derive
the cost of capital for investment decision-making purposes. The following information is available concerning the two businesses for the year to 30 November Year 8:
Riphean plc
Silurian plc
Profit for the year
£3.0m
£4.0m
Dividends
£1.5m
£2.0m
Market value per ordinary share
£4.00
£1.60
Number of ordinary shares
Gross interest yield on loan capital
5m
10m
8%
12%
Market value of loan capital
£10m
£16m
The annual growth rate in dividends is 5 per cent for Riphean plc and 8 per cent for Silurian plc. Assume a 30 per cent tax rate.

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