Gadner Co wishes to calculate its weighted average cost of capital. The company has the following sources of finance:

	$000
Ordinary shares	8,000
10% Preference shares	2,000
8% Loan notes	6,000
Bank loan	2,000
	18,000

The ordinary shares have a nominal value of $0.20 per share and are currently trading at $6.35 per share. The equity beta of Gadner Co is 1.25.

The preference shares are irredeemable and have a nominal value of $0.50. They are currently trading at $0.55 per share.

The 8% loan notes have a nominal value of $100 per loan note and a market value of $108.29 per loan note. They are redeemable in six years' time at a 5% premium to nominal value.

The bank loan charges fixed interest of 7% per year.

The yield on short-dated UK treasury bills is 4% and the equity risk premium is 5.6% per year. Gadner Co pays corporation tax of 20%.

Questions

1. Calculate the market value weighted average cost of capital of Gadner Co. ?

2. Explain the meaning of the terms business risk and financial risk. ?

3. Discuss the key features of a rights issue as a way of raising equity finance.