Question
The following figures have been extracted from the financial statements of KND Ltd: Book Value of Current Assets $45 million and Current Liabilities $34.75 million
The following figures have been extracted from the financial statements of KND Ltd:
Book Value of Current Assets $45 million and Current Liabilities $34.75 million 11% Debentures: $27 million debentures issued at $1,000. Long-term Loan: $7.18 million Preference Share Capital: 8.8 million shares issued at $2 per share Retained Earnings: $28.30 million Ordinary Share Capital: 39 million shares issued at $1 per share General Reserves $9.20 million The following additional information has been provided by the manager of the company:
Government bonds are currently yielding 6.3% per annum. The current market return on equity is estimated to be 13.5% per annum. Debenture coupons are paid annually, with 16 years to maturity. The company tax rate is 34%. The loan requires a 9% p.a. interest payment, compounded monthly. A merchant banker suggests that KND Ltd would have to offer a rate of 13.9% p.a. on any new issue of 16-year debentures. 12% Preference shares of KND Ltd are currently traded at $3.79 per share KND Ltd ordinary shares have recently traded at $3.61 and the company's financial manager believes that a beta of 1.7 is appropriate for the company.
A). Using relevant information, estimate the weighted average cost of capital for KND Ltd. Round your answer to 4 decimal points, for example, if your answer is 12.3476%, write as 0.1235. (4 Marks)
B). Using your own words, explain the use of WACC along with the CAPM for evaluating prospective projects. (2 Marks)
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