Company Z is a computer manufacturing company that is considering diversifying into financial services. This will require an investment of £100 million and this is to be raised via an equity issue. Given the following information, calculate the weighted average cost of capital (WACC) making sure that you clearly state any assumptions made: Dividend per share, d0 = 10p. The market price per share, PE = 108p cumulative div. Earnings per share, eps = 15p. Book Value of Capital Employed = £8,400,000. There are 28 million shares in issue. £30m. 17% irredeemable debt currently quoted at £120 ex int. 800,000, 8% redeemable debentures which are redeemable in 4 years’ time and have a current market price of £82.50 ex int. £5m. 7-year term loan at 5% over base. Bank base rate = 11%. Corporation tax = 30%. B)What assumptions lie behind the use of the WACC as a discount rate in investment appraisal. C)In light of the above assumptions and the answer to part (a), is it safe for Company Z to use the WACC calculated in part (a) to appraise the new investment it is considering?
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
A)Company Z is a computer manufacturing company that is considering diversifying into financial services. This will require an investment of £100 million and this is to be raised via an equity issue. Given the following information, calculate the weighted average cost of capital (WACC) making sure that you clearly state any assumptions made:
Dividend per share, d0 = 10p.
The market price per share, PE = 108p cumulative div.
Earnings per share, eps = 15p.
Book Value of Capital Employed = £8,400,000.
There are 28 million shares in issue.
£30m. 17% irredeemable debt currently quoted at £120 ex int. 800,000, 8% redeemable debentures which are redeemable
in 4 years’ time and have a current market price of £82.50 ex int. £5m. 7-year term loan at 5% over base.
Bank base rate = 11%.
Corporation tax = 30%.
B)What assumptions lie behind the use of the WACC as a discount rate in investment appraisal.
C)In light of the above assumptions and the answer to part (a), is it safe for Company Z to use the WACC calculated in part (a) to appraise the new investment it is considering?
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