Premium Essay

Financial Managemnet

In: Business and Management

Submitted By harneetkaur
Words 1794
Pages 8
Question 1 Calculate the Company’s Weighted Average Cost of Capital

Bank Overdraft

EAR = (1+i/n )^n - 1

(1 + 0.08/12) ^ 12 -1 = 0.0830

Cost of Bank overdraft: = EAR (1-t)

= 0.830 (1-0.30)

= 0.0581

Debentures

Current market price = $309.29

Face value = $300.00

Annual coupon rate = 13.5% ( paid half yearly)

Further flotation cost ( if any) = $1.50

(300* 13.5%) = 40.5/2 = 20.25

Present value of annuity = $20.25

Pmt = $20.25

MP= Pmt * 1 – ( 1)/ (1+i)^n i

20.25 * 1 – 1/ ( 1+ 0.00675)^ 14 0.0675

= $ 179.78

Discount back the face value to 0

= FV….. ( 1+i)^n

= 300.00 = $120.21
(1+0.0675)^14

EAR = (1+6.4084%) ^ 2 -1 = .1323

Cost of debt = EAR ( 1- t ) .1323 ( 1-0.30) = 0.0926

Cost of Preference Shares (Keps) = Dividend Market Price

1.10 = 0.1358024 8.10

Dividend per share= 275000 = $1.10 250000

Cost of Ordinary Share Capital (Keos) = D 0 * ( 1+G) + G MP

Dividend per share ( D0)= 1125000 = 0.15 750000

= 0.15(1+0.06) + 0.06 =0.150857

1.75 Calculation of Weighted Average Cost of Capital

|Long Term Debt |MV |Weight

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