Mariana ple's shares are not traded in any recognized market. It sole activity is saloon car hire. It is financed by a combination of 2 million $ 0.50 ordinary shares and a $ 1.5 million bank loan. Very recently Leroux plc, a national car hire group, offered a total of $ 5.5 million to acquire the entire equity of Mariana ple. The bill failed because the majority of shareholders rejected it since they wished to retain control of the business, despite believing the offer to represent a fair price for the shares. The bank loan is at a floating rate of interest of 10 per cent p.a. and is secured on various fixed assets. The value of the bank loan is considered to be very close to the nominal value. Mariana ple's capital structure (by market value) represents what it has been, and is intended to continue to be, its target structure. The management is in the process of assessing a major investment, to be financed from retained earnings, in some depots, similar to the business existing ones. An appropriate cost of capital figure is required for this purpose. The dividend growth model has been proposed as a suitable basis for the estimation of the cost of equity. Recent annual dividends per share have been: 2 3 4 5 6 7 8 Years 1 Dividends, 0.0800 in $ 0.0900 0.1050 0.1125 0.1250 0.1350 0.1450 0.1550 Mariana plc's rate of corporation tax is expected to be 33 per cent, for the foreseeable future. Required: a) Estimate Mariana ple's weighted average cost of capital, ignoring inflation b) What assumptions are being made in using the WACC figure as the basis of the discount rate? mm Mariana ple's shares are not traded in any recognized market. It sole activity is saloon car hire. It is financed by a combination of 2 million $ 0.50 ordinary shares and a $ 1.5 million bank loan. Very recently Leroux plc, a national car hire group, offered a total of $ 5.5 million to acquire the entire equity of Mariana ple. The bill failed because the majority of shareholders rejected it since they wished to retain control of the business, despite believing the offer to represent a fair price for the shares. The bank loan is at a floating rate of interest of 10 per cent p.a. and is secured on various fixed assets. The value of the bank loan is considered to be very close to the nominal value. Mariana ple's capital structure (by market value) represents what it has been, and is intended to continue to be, its target structure. The management is in the process of assessing a major investment, to be financed from retained earnings, in some depots, similar to the business existing ones. An appropriate cost of capital figure is required for this purpose. The dividend growth model has been proposed as a suitable basis for the estimation of the cost of equity. Recent annual dividends per share have been: 2 3 4 5 6 7 8 Years 1 Dividends, 0.0800 in $ 0.0900 0.1050 0.1125 0.1250 0.1350 0.1450 0.1550 Mariana plc's rate of corporation tax is expected to be 33 per cent, for the foreseeable future. Required: a) Estimate Mariana ple's weighted average cost of capital, ignoring inflation b) What assumptions are being made in using the WACC figure as the basis of the discount rate? mm
