The following information has been taken from the accounts of Merlin plc: 

(i) The current ex div ordinary share price of Merlin plc is £3.14. Both dividends and share price are expected to increase by 7 per cent per year for the foreseeable future. 

(ii) The 12 per cent bonds are redeemable in five years’ time at £100 nominal. The current ex interest market price of the bonds is £114. 

(iii) The 9 per cent bonds are convertible in three years’ time into 40 ordinary shares of Merlin plc per bond or in four years’ time into 35 ordinary shares per bond. The current ex-interest market price of the convertible bonds is £119 per £100 bond. If not converted, the bonds will be redeemed at £100 nominal after four years. 

(iv) The corporation tax rate is 19 per cent.

(a) Calculate the cost of debt of the 12 per cent redeemable bonds. 

(b) Calculate the cost of debt of the convertible bonds. 

(c) If a dividend of 35p per ordinary share has just been paid, calculate the cost of equity. 

(d) Calculate the weighted average after-tax cost of capital of Merlin plc.

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Non-current assets Current assets Total assets Equity finance Ordinary shares (£1 nominal) (i) Reserves Non-current liabilities 12% bonds (ii) 9% convertible bonds (iii) Current liabilities Total liabilities £000 225 150 500 250 £000 872 573 1,445 375 750 320 1,445