you have used the company’s estimated cost of capital of 10%. The other directors are familiar with this term but do not understand where the 10% comes from. In order to demonstrate this, you look at the financial structure of the company and the sources of finance which have been utilised.

Your aim is to calculate the cost for each type of finance and then combine the results to show the overall cost of capital, referred to as the Weighted Average Cost of Capital

The financial structure of Wholesale Foods PLC is as follows:

1. 53m of £1 ordinary shares with a market value of £2.25 per share. Dividend last year was 8p per share and the dividend has grown by 7% over the past 5 years.
2. 10m of 7.5% £1 preference shares with a market value of £1.20 per share. These preference shares were issued at a cost of 5%.
3. £10m of 8% Bank Loan.
4. £15m of 6% Loan Stock, not redeemable for many years to come. The market price of each unit is presently £90.

Corporation Tax in the UK is 25%.

Required:

To help you explain the concept of cost of capital to the directors, calculate the weighted average cost of capital for Wholesale Foods PLC.