solution - how do i arrive at this solution

mony. Me uppropre LUSIUI Uevi cupru 15 per cent per cent per annur Calculating cost of capital (LO 5) The management of Heavy Clay Ltd wants to know the cos You have been told that funds will be raised for this purpose accord lay Lid wants to know the cost of capital associated with expanding its bu in the market value of its securities. Your task is to calculate the cost of nds will be raised for this purpose according to a target capital structure reflecta information may assist you in your task: securities. Your task is to calculate the cost of capital for the company. The follow al The 13 per cent debentures have just been issued and interest rates on This rate was l per cent per annum above the interest rate on governmem b) The last observed market price of the preference shares was $1, whereas ordinary shares. s cl The beta of equity of Heavy Clay was recently estimated at 0.5, while the consenso expected rate of return for the market is 18 per cent per annum, which includes a franking pr of 2 per cent. extract of the most recent statement of financial position shows Liabilities and shareholders' funds Debentures ($ 000) 2500 75 preference shares ($2 face value) Paid-up capital ($1 face value) 1000 3000 Reserves 500 7000 A The statutory company income tax rate is 30 cents in the dollar. The dividends on Heavy Clay's ordinary shares will be fully franked and all the shares are held by Australian residents. = R+ Be (E(Rx+t) - RA 0.12 +0.5(0.18-0.12) 0.15, or 15 per cent Dp Po $0.14 $1.00 14 per cent 0.13, or 13 per cent ka = Note: as all the shares are held by Australian residents, it is assumed that ta=0. Calculation of WACC (1) W Market value ($'000s) eight Cost (%) Weighted cost (%) 2 500() 2.71 Ordinary shares 9 000 0.7500 15.00 11.25 Preference shares 500 0.0417 14.00 0.59 Debentures 0.2083 13.00 Total 12 000 1.0000 14.55 (a) Market value is equal to book value because interest rates have not changed since the debentures were issued. ... k = 14.55 per cent