Question Robinson plc have decided that in order to make better investment appraisal decisions they need to re-calculate the company's cost of capital. The following information is extracted from the company's statement of financial position (balance sheet): £ (millions) Fixed assets: 890 Current assets: 370 Current liabilities: _(220) Non-current liabilities: 5% Bonds (£100 par) redeemable in 7 years_(160) 4% Irredeemable Bonds (£100 par) (190) Bank Loan (120) Share capital and reserves Ordinary Shares (nominal value 50p)___ 180 7% Preference shares (£1 nominal value) 100 Reserves 290 Additional information: The risk-free rate of return on short-dated government bonds is currently 3%. The market risk premium has been estimated at 7% and the company's beta is 1.5. The company's ordinary share price is £3 and the preference share price is £0.8. The irredeemable bonds are currently trading at a 5% discount to par value and the redeemable bonds are currently trading at £105. The rate of interest payable on the loan is 8% and the corporation tax rate is 25%. Required: 1. Calculate the cost of each source of finance used by Robinson plc, including their reserves. 2. Calculate the weighted average cost of capital for Robinson plc using market weightings.
Question Robinson plc have decided that in order to make better investment appraisal decisions they need to re-calculate the company's cost of capital. The following information is extracted from the company's statement of financial position (balance sheet): £ (millions) Fixed assets: 890 Current assets: 370 Current liabilities: _(220) Non-current liabilities: 5% Bonds (£100 par) redeemable in 7 years_(160) 4% Irredeemable Bonds (£100 par) (190) Bank Loan (120) Share capital and reserves Ordinary Shares (nominal value 50p)___ 180 7% Preference shares (£1 nominal value) 100 Reserves 290 Additional information: The risk-free rate of return on short-dated government bonds is currently 3%. The market risk premium has been estimated at 7% and the company's beta is 1.5. The company's ordinary share price is £3 and the preference share price is £0.8. The irredeemable bonds are currently trading at a 5% discount to par value and the redeemable bonds are currently trading at £105. The rate of interest payable on the loan is 8% and the corporation tax rate is 25%. Required: 1. Calculate the cost of each source of finance used by Robinson plc, including their reserves. 2. Calculate the weighted average cost of capital for Robinson plc using market weightings.
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
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Robinson plc have decided that in order to make better investment appraisal decisions they
need to re-calculate the company's cost of capital.
The following information is extracted from the company's statement of financial position
(balance sheet):
£ (millions)
Fixed assets:
890
Current assets:
370
Current liabilities:
(220)
Non-current liabilities:
5% Bonds (£100 par) redeemable in 7 years (160)
4% Irredeemable Bonds (£100 par)
(190)
Bank Loan
(120)
Share capital and reserves
Ordinary Shares (nominal value 50p)___
180
7% Preference shares (£1 nominal value)
100
Reserves
290
Additional information:
The risk-free rate of return on short-dated government bonds is currently 3%.
The market risk premium has been estimated at 7% and the company's beta is 1.5. The
company's ordinary share price is £3 and the preference share price is £0.8.
The irredeemable bonds are currently trading at a 5% discount to par value and the
redeemable bonds are currently trading at £105.
The rate of interest payable on the loan is 8% and the corporation tax rate is 25%.
Required:
1. Calculate the cost of each source of finance used by Robinson plc, including their
reserves.
2. Calculate the weighted average cost of capital for Robinson plc using market
weightings.
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