ney Ltd is a stock-exchange listed company. The capital structure of the company as at 31 December 2015 is as follows: Equity Rs million Ordinary Shares of Rs2 per share 400 Reserves 300 11% Preference Shares 200 Non-Current Liabilities Bond X (par value Rs1000) 400 Bond Y (par value Rs1000) 250 Faubney Ltd has an equity beta of 1.4. The risk-free rate of return is 4% per year and the average return on the market is 12% per year. Ordinary dividend paid for the year 2015
Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
Faubney Ltd is a stock-exchange listed company. The capital structure of the company
as at 31 December 2015 is as follows:
Equity Rs million
Ordinary Shares of Rs2 per share 400
Reserves 300
11%
Non-Current Liabilities
Bond X (par value Rs1000) 400
Bond Y (par value Rs1000) 250
Faubney Ltd has an equity beta of 1.4. The risk-free
average return on the market is 12% per year. Ordinary dividend paid for the year 2015
was Rs120 million. The dividends of the company have grown in recent years by an
average rate of 5% per year.
The company issued preference shares at Rs1.25 per share and they are currently traded
at Rs1.40 per share.
Bond X will be redeemed at par in 9 years' time and pays annual interest of 9%. The
current market price of the bond is Rs960. Bond Y will be redeemed at par in 4 years'
time and pays annual interest of 7.5%. The current market price of the bond is Rs1050.
Bond X and Bond Y were issued at the same time. The company pays tax on profit at an
annual rate of 20%.
Required
a. Calculate the weighted average after-tax cost of capital for Faubney Ltd. Use
market values where appropriate.
b. Discuss the reasons why different bonds of the same company might have
different costs of debt.
Weighted average cost of capital is the weighted cost of equity, weighted cost of debt and weighted cost of preference shares.
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