MINI-CASE-V2.13C6.55

The following figures have been extracted from the financial statements of KND Ltd:

> Book Value of Current Assets $45 million and Current Liabilities $34.75 million

> 10% Debentures: $28 million debentures issued at $1,000.

> Long-term Loan: $6.55 million

> Preference Share Capital: 8.5 million shares issued at $3 per share

> Retained Earnings: $28.30 million

> Ordinary Share Capital: 31 million shares issued at $1 per share

> General Reserves $9.20 million

The following additional information has been provided by the manager of the company:

> Government bonds are currently yielding 5.7% per annum.

> The current market return on equity is estimated to be 12.4% per annum.

> Debenture coupons are paid semi-annually, with 23 years to maturity.

> The company tax rate is 32%.

> The loan requires an 8% interest payment, compounded monthly.

> A merchant banker suggests that KND Ltd would have to offer a rate of 12.4% p.a. on any new issue of 23-year debentures.

> 12% Preference shares of KND Ltd are currently traded at $2.13 per share

> KND Ltd ordinary shares have recently traded at $3.77 and the company's financial manager believes that a beta of 2.1 is appropriate for the company.

Requirement-A. Using relevant information, estimate the weighted average cost of capital for KND Ltd. <4 marks>

Requirement-B. Using your own words, explain the use of WACC along with the CAPM for evaluating prospective projects. <2 marks>