Question 7

1. Assume the following information for a company:

• There are 10 million ordinary shares.The beta of the shares is 1.9, the risk-free rate is 1.5% pa and the return on the market is 8% pa. The shares last traded at $9.00 per share.
• 90-day bank bills have just been issued with a Face Value of $20m and yield of 1% pa.
• Bonds exist with a total face value of $25m, a market value of $25m, a coupon of 3% pa paid semi-annually and 10 years to maturity.
• The company accounts show $5m in retained earnings and $8m in trade credit (accounts payable).
• Perpetual Preference shares exist which pay an annual a dividend of $0.30 and are currently trading at $3.00. There are 5m of these preference shares on issue.
• The corporate tax rate is 30%.

1. Calculate the Weighted Average Cost of Capital on an after-tax basis. What limitations apply to the use of this WACC?