3. Jenna Mines Limited (JML) is considering an expansion of its underground gold

Question

3. Jenna Mines Limited (JML) is considering an expansion of its underground gold mine and has asked its investment bank to calculate its weighted average cost of capital (WACC) that is applicable to the expansion. The following table lists some information from JML's balance sheet. Book Value Bonds Preference Shares Ordinary Shares: Total 370 million 120 million 350 million 840 million The investment bank's report revealed the following The bonds were issued 4 years ago and have 8 years until maturity. The bonds have a coupon rate of 8.5% pa. paid annually. The current market yield on a JML Bond is 9.52% pa. and each ML bond has a face value of $100,000 . JML shares are listed on the Australian Securities Exchange (ASX) and are currently trading at $4.18 each. JML has 88 million shares on issue. JML has a beta of 1.65. Next year's dividend is projected to be $0.58 Government bonds have a current yield of 6% pa. and the return on the market portfolio is 13.5%. The preference shares never mature, have a face value of $4, and a market price per share of $4.93. The preference shares have an annual dividend rate of 15%. . You are required to calculate the WACC for JML. The company tax rate is 30%. (a) What is the required rate of return on debt? (b) What is the required rate of return on preference shares? (c) What is the required rate of return on ordinary shares? (d) What is the total market value of the bonds? (e) What is the total market value of preference shares? (f) What is the total market value of ordinary shares? (g) What is the weighted average cost of capital for Jenna Mines Limited?

Explanation / Answer

Weighted Average of Cost of Capital : WACC

Rate of return on Debt  

Copoun rate = 8.5 x ( 1-0.3)

= 5.95 %

Rate of return on Preference Shares = 15%

Rate of return on Ordinary Shares

= Risk Free rate + Beta X ( Market return - Risk free rate )

= 6 % + 1.65 ( 13.5 - 6 )

= 18.375%

Weighted Average Cost of Capital WACC

= After tax cost of Debt X Debt / Total Capital + Rate of Preference Share X Preference Share Capital / Total Capital + Rate of Ordinary Shares X Ordinary Shares / Total Capital

= 5.95 X 370 / 840 + 15 X 120 / 840 + 18.375 X 350 / 840

= 12.42 %

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