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Extract of balance sheet for Cardigan Ltd. as at 31 March 2021: Equity $'000 Issued And Paid-Up Capital 75m 50c ordinary shares 37,500 9.5m $1
Extract of balance sheet for Cardigan Ltd. as at 31 March 2021:
Equity $'000
Issued And Paid-Up Capital
75m 50c ordinary shares 37,500
9.5m $1 3.5% preference shares 9,500
Reserves and Retained Profits
Retained profits 11,000
Share premium reserve 13,800
General reserve 4,000
71,050
Debt
Mortgage 5,300
Debentures ($1000 each) 6,250
Bank overdraft 14,804
26,354
You also have the following additional information available to you as of today:
- The current market price of the firm's ordinary shares is $1.00.
- The firm's preference shares are currently selling for 35 cents each.
- The debentures will mature in 2 years. They have a coupon rate of 10% per annum.
- If the company currently sought long-term finance it would have to pay interest rates of 12% per annum on debentures. An amount of $5,300,000 is owing on the mortgage and has 6 years remaining and was taken out at 12% current rates are 14%
- The firm is currently paying 11% per annum on its bank overdraft loan.
- Interest on debentures. mortgage and the bank overdraft is paid half-yearly.
- The corporate tax rate is 50 %.
- The estimated Beta of the company's ordinary shares is 1.
- The current yield on a 10-year government bond is 12% per annum
- The expected return on the market portfolio is 17% per annum.
REQUIRED:
- Identify the various items that need to be included in the capital base to calculate the WACC.
(3 marks)
- Calculate the market value of the various items identified in (a), the value of the firm and the relative weight of each item in the firms capital structure.
(5 marks)
- Calculate the required after-tax rate of return of each item identified in (a)
(3 marks)
- Calculate the firms WACC.
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