Required: . Use divided valuation model to obtain the cost of equity ii. Calculate after tax cost of debt Calculate Weighted Cost of Capital (WACC) using market value weights.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
![Question 14 (Group 13 & Group 5 [Acc])
Panyaroad Plc has just paid a dividend of USD 8 per share. The market value of share is USD 93. The following has been
extracted from the Statement of Financial Position of Panyaroad Plc.
USD
Ordinary share capital 10,000@50
Retained Earnings
12% Redeemable debenture 1000@100
TOTAL (USD)
500,000
250,000
100,000
850,000
The market value of debenture is USD 95, redeemable three year from now. Dividend paid in previous yea is shown
below:
Year
1
2
3
5
6
Dividend Paid
7.25
8.00
5.45
5.90
6.00
7.40
The company is in a 35% tax bracket
Required:
Use divided valuation model to obtain the cost of equity
Calculate after tax cost of debt
i.
ii.
ii.
Calculate Weighted Cost of Capital (WACC) using market value weights.
iv.
The above company wishes to raise an additional USD 100,000 to invest in a project which would produce USD
20,000 per annum indefinitely.
a. If the company's capital structure is considered optimal, should the company undertake this project?
b. If the USD 100,000 is to be raised by issuing more ordinary shares, is WACC appropriate discount rate?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F20080920-5b71-4f46-95a9-bf75b7b4a01b%2F423c2f75-0b2d-42e9-a635-92432f2cded8%2Fmnehno_processed.jpeg&w=3840&q=75)
Step by step
Solved in 3 steps
