SYPETCO Ltd is a leading company in Australia and you the below details relating to the capital structure of the company. Information concerning raising new capital Bonds $1,000 Face value 13% Coupon Rate (Annual Payments) 20 Term (Years) $25 Discount offered (required) to sell new bonds $10 Flotation Cost per bond Preference Shares 11% Required rate to sell new preference shares $100 Face Value $3 Flotation cost per share Ordinary Shares $83.33 Current Market Price $4.00 Discount on share price to sell new shares $5.40 Flotation Cost per bond $5.00 2021 - Proposed Dividend Dividend History $4.63 2020 $4.29 2019 $3.97 2018 $3.68 2017 $3.40 2016 Current Capital Structure Extract from Balance Sheet $1,000,000 Long-Term Debt $800,000 Preference Shares $2,000,000 Ordinary Shares Current Market Values $2,000,000 Long-Term Debt $750,000 Preference Shares $4,000,000 Ordinary Shares Tax Rate 33% Risk Free Rate 5% a) Calculate the cost associated with each new source of finance. The firm has no retained earnings available. b) Calculate the WACC given the existing weights The financial controller does not believe the existing capital structure weights are appropriate to minimise the firm’s cost of capital in the medium term and believes they should be as follows Long-term debt 40% Preference Shares 15% Ordinary Shares 45% c) What impact do these new weights have on the WACC?
SYPETCO Ltd is a leading company in Australia and you the below details relating to the capital structure of the company.
Information concerning raising new capital
Bonds $1,000 Face value
13% Coupon Rate (Annual Payments)
20 Term (Years)
$25 Discount offered (required) to sell new bonds
$10 Flotation Cost per bond
$100 Face Value
$3 Flotation cost per share
Ordinary Shares $83.33 Current Market Price
$4.00 Discount on share price to sell new shares
$5.40 Flotation Cost per bond
$5.00 2021 - Proposed Dividend
Dividend History $4.63 2020
$4.29 2019
$3.97 2018
$3.68 2017
$3.40 2016
Current Capital Structure
Extract from
Sheet
$800,000 Preference Shares
$2,000,000 Ordinary Shares
Current Market Values $2,000,000 Long-Term Debt
$750,000 Preference Shares
$4,000,000 Ordinary Shares
Tax Rate 33%
Risk Free Rate 5%
a) Calculate the cost associated with each new source of finance. The firm has no
b) Calculate the WACC given the existing weights
The financial controller does not believe the existing capital structure weights are appropriate to minimise the firm’s cost of capital in the medium term and believes they should be as follows
Long-term debt 40%
Preference Shares 15%
Ordinary Shares 45%
c) What impact do these new weights have on the WACC?
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