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Assume the following information for a company: There are 5 million ordinary shares. The beta of the shares is -0.4, the risk-free rate is 3%
Assume the following information for a company:
- There are 5 million ordinary shares. The beta of the shares is -0.4, the risk-free rate is 3% pa and the return on the market is 11% pa. The shares last traded at $10.00 per share.
- An overdraft of $15 million attracts an interest rate of 6% pa compounded monthly.
- 90-day bank bills have just been issued with a Face Value of $10m and yield of 5% pa.
- The company accounts show $8m in retained earnings and $6m in trade credit (accounts payable).
- Perpetual Preference shares exist which pay an annual a dividend of $0.30 and are currently trading at $3.40. There are 4m of these preference shares on issue.
- The corporate tax rate is 30%.
Calculate the Weighted Average Cost of Capital on an after-tax basis. What limitations apply to the use of this WACC?
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