(Examination level) Burgundy plc is financed through bonds and ordinary shares. The bonds were issued five years ago at a par value of £100 (total funds raised £5m). They carry an annual coupon of 10 per cent, are due to be redeemed in four years and are currently trading at £105. The company's shares have a market value of £4m, the return on risk-free government securities is 8 per cent and the risk premium for an average-risk share has been 5 per cent. Burgundy's shares have a lower than average risk and its historic beta as measured by the co-movement of its shares and the market index correctly reflects the risk adjustment necessary to the average risk premium – this is 0.85. The corporate tax rate is 30 per cent. Burgundy has a net asset figure of £3.5m showing in its balance sheet. Required Calculate the cost of debt capital. Calculate the cost of equity capital. Calculate the weighted average cost of capital. a
(Examination level) Burgundy plc is financed through bonds and ordinary shares. The bonds were issued five years ago at a par value of £100 (total funds raised £5m). They carry an annual coupon of 10 per cent, are due to be redeemed in four years and are currently trading at £105. The company's shares have a market value of £4m, the return on risk-free government securities is 8 per cent and the risk premium for an average-risk share has been 5 per cent. Burgundy's shares have a lower than average risk and its historic beta as measured by the co-movement of its shares and the market index correctly reflects the risk adjustment necessary to the average risk premium – this is 0.85. The corporate tax rate is 30 per cent. Burgundy has a net asset figure of £3.5m showing in its balance sheet. Required Calculate the cost of debt capital. Calculate the cost of equity capital. Calculate the weighted average cost of capital. a
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A , b ,c only
Transcribed Image Text:1 (Examination level) Burgundy plc is financed through bonds and ordinary shares. The bonds were issued five
years ago at a par value of £100 (total funds raised £5m). They carry an annual coupon of 10 per cent, are due to be
redeemed in four years and are currently trading at £105.
The company's shares have a market value of £4m, the return on risk-free government securities is 8 per cent and the
risk premium for an average-risk share has been 5 per cent. Burgundy's shares have a lower than average risk and its
historic beta as measured by the co-movement of its shares and the market index correctly reflects the risk adjustment
necessary to the average risk premium - this is 0.85. The corporate tax rate is 30 per cent. Burgundy has a net asset figure
of £3.5m showing in its balance sheet.
Required
Calculate the cost of debt capital.
Calculate the cost of equity capital.
Calculate the weighted average cost of capital.
Should Burgundy use the WACC for all future projects and SBUS? Explain your answer.
a
C
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