Question
A:The annual report of WTC Ltd provides the following information about the firm. It has 20 million ordinary shares outstanding, ordinary issued capital of $45.0
A:The annual report of WTC Ltd provides the following information about the firm. It has 20 millionordinary shares outstanding, ordinary issued capital of $45.0 million and retained earnings of $17.5million. The current market price of the ordinary shares is $1.50 per share. The beta of ordinary sharesis 1.5, the market risk premium is 8% p.a. and the riskfree rate is 6% p.a. The firms debt consists of100,000 bonds paying an annual coupon rate of 10% and maturing in 4 years time. Each bond has aface value of $100. The current market yield on the bonds is 8.0% p.a. It also has 150,000 preferenceshares outstanding, each with a face (or par) value of $100.00 and paying a fixed annual dividend rateof 12% p.a. The current market price of the preference shares is $80.00 per share. The company tax
rate is 30%.
a) Calculate WTCs before-tax weighted average cost of capital. Show all calculations.
b) Outline the two circumstances in which the weighted average cost of capital cannot be used in
analyzing the investment projects being considered by the firm.
B:The finance manager of Megacorp Ltd has approached you for assistance with the firms capital budgeting process. At your request, she has provided you with the following information in relation to the firms finances. Some years ago, the firm issued 100,000 bonds (each with a $100 face value) bearing a coupon rate of 6% paid annually. These bonds are currently trading on the market at par. A coupon payment relating to the bonds was made yesterday and the bonds will mature three years from today. The firm has 20 million ordinary shares on issue. Their book value is $1.00, and they are currently trading at $1.50. The beta of the ordinary shares has been estimated at 1.2, the rate of return on 10-year Commonwealth bonds is currently at 5% and the market risk premium has been estimated at 8%. a) Compute Megacorp Ltds weighted average cost of capital. Show all calculations.
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