Question 2

ZZX Inc. has the following information currently:

Number of ordinary shares : 30 million

Book value of 12% irredeemable debentures : 58 million

Book value of 8% bank loan : 7 million

Market price of ordinary shares : 6 per share

Market value of debenture : 120 per 100 debenture

ABCs recently paid dividends : 15p per share

Dividend growth rate : 4% in the foreseeable future

Rate of taxation : 30%

Required:

Compute the companys cost of equity. [4 marks]

Compute the companys after-tax cost of the debentures [4 marks]

Compute the after-tax cost of the companys bank loan. [4 marks]

Compute the companys weighted average cost of capital. [9 marks]

State two situations when the WACC may be used to assess the companys project. [4 marks]