The newly appointed finance director of Athena PLC is currently reviewing the capital

structure of her company. She is convinced that the company is not financing itself in a way

that minimises its cost of capital (WACC). The companys financing as at 31 December 2022 is

as follows:

Ordinary shares, 1.00 each= 15000

Reserves= 10000

7% preference shares, 1 each= 10000

10% bonds (redeemable after 7 years)= 15000

Total capital = 50000

Other information from stock market (as at 31December 2022):

Ordinary share price (ex-div) 2.65

Preference share price (ex-div) 75p

Bond price for 10% bonds 102 per 100

Last 5 years dividends (most recent last): 22p, 23p, 25p 27p, 29p

The finance director, that by issuing more debt the company will be able to reduce its cost of

capital. She proposes the issue of 15m of 11 per cent bonds. These bonds will be sold at a 5

per cent premium to their par value and will mature after seven years. The funds raised will be

used to repurchase ordinary shares which the company will then cancel. She expects that this

repurchase will cause the companys share price to rise to 2.78 and the future dividend growth

rate to increase by 20 per cent (in relative terms). She expects the price of the 10 per cent bonds

to be unaffected, but the price of the preference shares to fall to 68p. Corporate tax stands at 30

per cent.

Required:

B. Given the proposed changes to Athena capital structure, recalculate the companys cost

of capital to reflect these changes and comment on the finance directors projections.