Question $13$

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You are the Chief Financial Officer for PEP Co and are preparing the way for a restructuring of the company's balance sheet. Most importantly, you need to calculate the cost of capital of the firm under the current capital structure.

Given the following sources of finance, answer the questions below to help determine the firm's weighted average cost of capital.

$\backslash$table$[[$PEP Co: selected balance sheet data as at $30$ June $2023,],[$Sources of finance,Book value $($$m$)],[$Bank overdraft,$7\mathrm{.}368],[$Coupon Bonds,$20\mathrm{.}0],[$Preference shares, $8\mathrm{.}0\%,2\mathrm{.}0],[$Ordinary shares: $12\mathrm{.}5$ million shares issued at $50$ cents,$],[$per share,$]]$

Further information:

The interest rate on the bank overdraft is $9\mathrm{.}5$ per cent per annum, compounded semi$-$annually.

There are $200$ bonds, each with a face value of $$100,000$ and a coup"on rate of $10\mathrm{.}0$ per cent per annum, payable on $30$ June and $31$ December each year. The bonds will be redeemed at their face value on $30$ June $2027.$ On $30$ June $2023,$ the market yield is $10\mathrm{.}0$ per cent per annum, compounded semi$-$annually. A coupon payment has just been paid.

per share

Further information:

The interest rate on the bank overdraft is $9\mathrm{.}5$ per cent per annum, compounded semi$-$annually.

There are $200$ bonds, each with a face value of $$100,000$ and a coupon rate of $10\mathrm{.}0$ per cent per annum, payable on $30$ June and $31$ December each year. The bonds will be redeemed at their face value on $30$ June $2027.$ On $30$ June $2023,$ the market yield is $10\mathrm{.}0$ per cent per annum, compounded semi$-$annually. A coupon payment has just been paid.

The preference shares have a face value of $$2$ and pay a dividend rate of $8\mathrm{.}0$ per cent per annum. Preferred dividends are payable on $30$ June each year. On $30$

June $2023,$ the market price of each preference share was $$1\mathrm{.}5.$ A preferred dividend has just been paid.

The firm pays dividends on its ordinary shares once per year on $30$ June. The last dividend, which has just been paid, was $18\mathrm{.}0$ cents. Analysts predict that the long$-$term growth rate is $3\mathrm{.}0$ per cent per annum. On $30$ June $2023,$ the market price of each ordinary share was $$4\mathrm{.}25.$

The company operates under a classical tax system. The company tax rate is $28\mathrm{.}0\%$

On $30$ June $2023$:

What is PEP's pre$-$tax cost of debt on the bank overdraft? $($Give as an effective rate$)$

$\%($Enter to $2$ decimal places$)$

On $30$ June $2023$:

What is PEP's pre$-$tax cost of debt on the bank overdraft? $($Give as an effective rate$)$

$\%($Enter to $2$ decimal places$)$

What is PEP's pre$-$tax cost of debt on the bonds? $($Give as an effective rate$)$

$\%($Enter to $2$ decimal places$)$

What is PEP's market value of bonds?

$ million $($Enter in millions to $2$ decimal places$)$

What is PEP's cost of preference shares?

$\%($Enter to $2$ decimal places$)$

What is PEP's market value of preference shares?

$ million $($Enter in millions to $2$ decimal places$)$

What is PEP's cost of ordinary shares?

rate$)$

$\%($Enter to $2$ decimal places$)$

$2.$ What is PEP's pre$-$tax cost of debt on the bonds? $($Give as an effective rate$)$

$\%($Enter to $2$ decimal places$)$

$3.$ What is PEP's market value of bonds?

$ million $($Enter in millions to $2$ decimal places$)$

$4.$ What is PEP's cost of preference shares?

$6($Enter to $2$ decimal places$)$

$5.$ What is PEP's market value of preference shares?

$ $$ nillion $($Enter in millions to $2$ decimal places$)$

$6.$ What is PEP's cost of ordinary shares?

$\%($Enter to $2$ decimal places$)$