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Assume the following information for a company: There are 5 million ordinary shares.Analysts consider it normal to double your money in four years in this

Assume the following information for a company:

  • There are 5 million ordinary shares.Analysts consider it normal to double your money in four years in this industry. The shares last traded at $9.00 per share.
  • An overdraft of $20 million attracts an interest rate of 3% pa compounded monthly.
  • 90-day bank bills have just been issued with a Face Value of $20m and yield of 1.2% pa.
  • Bonds exist with a total face value of $30m, a market value of $30m, a coupon of 2% pa paid semi-annually and 10 years to maturity.
  • The company accounts show $5m in retained earnings and $2m in trade credit (accounts payable).
  • 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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