Salad PLC is a vegetarian food manufacturing company that is keen to expand its current operations.

The Board is currently considering two sources of finance to raise the 2,000,000 required for the expansion; a redeemable bond issue or a rights issue of shares to existing shareholders.

The Chief Financial Officers main concern is the potential impact of an increase in the level of gearing on the value of the firm. He has asked you to provide some information which he can use at the forthcoming Board meeting.

He has provided you with the following data:

Current market values of the existing sources of finance used by the company are as follows:

Ordinary shares 170 pence (ex-div)

10% Preference shares 80 pence (ex-div)

9% Irredeemable loan stock 75 per 100 block (ex-int)

The companys capital structure as at 31 December 2020 is as follows:

Ordinary share capital (1 shares) = 12,000

Reserves = 2,000

10% Preference shares (1 shares) = 4,000

9% Secured irredeemable loan stock = 6,000

Additional information:

1. The last dividend paid to ordinary shareholders was 30 pence per share.
2. Records show that dividends to ordinary shareholders are growing at a constant rate of 5% per annum.
3. The current rate of corporation tax is 25%.

Required:

Calculate the current weighted average cost of capital (WACC) using current market values (show working).

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