22 WACC Barrkey plc is a listed company whose shares trade on the London Stock Exchange. There are 10m shares in issue at a market price of 2.10. The firm also has 20m of zero-coupon bonds in issue and these will mature in 5 year's time. The bonds are currently trading at a price of 68.05832 per 100 of nominal value. Barrkey pays Corporation Tax at 20% Barrkey has paid dividends over the last five years as follows: Just paid - 2yrs. - 3yrs - 5yrs 20p 19.73p 18.82p 17.03p 16.454p 30p - 1 yr - 4 yrs The dividend 5 years ago was unusually high and was paid entirely from the disposal of an overseas subsidiary. Since then, dividends have been paid from the profits of that year. You are required to: a) Calculate Barrkey's current debt:equity ratio and weighted average cost of capital. 6 marks Barrkey is considering raising a further 10m of finance through the issue of new convertible bonds. Barrkey's financial adviser were asked to design a bond that could be issued at par. After speaking with institutional investors the adviser has suggested the bond would need to offer a 12% coupon and with conversion terms of 100 shares per 100 of nominal value. You are required to: b) Calculate Barrkey's debt: equity ratio and weighted average cost of capital if the new bond is issued at par with a 12% coupon. (You are not required to value the conversion option and can assume the market price of the equity and zero-coupon bond are unchanged.) 6 marks c) Calculate the conversion premium on the bond issue. 2 marks d) Considering the bond already in issue as well as the proposed terms of the new issue discuss whether debt financing is suitable for Barrkey in the current circumstances. 6 marks