The Wish Co. (TWC) based in Nottingham, UK has several bonds issues outstanding,
ID: 2788296 • Letter: T
Question
The Wish Co. (TWC) based in Nottingham, UK has several bonds issues outstanding, each making half-yearly interest payments. The bonds are listed in the table below:
Company has 8,000,000 ordinary shares outstanding, one share sells at £30 at the London Stock Exchange (LSE). The company has a beta of 1.20 and last year paid a dividend of £2 per share. The dividend is expected to grow by 8% per year indefinitely. The expected return on the market in UK is 14%.
To support business growth in the past, the company had to issue 70,000 preference shares that pay a fixed dividend of 6%. Face value of one preference share is £1000, but they sell at the LSE at £930 each. The UK (government) T-Bills are currently yielding 6% p.a. and corporate tax rate is 30%.
Calculate the WACC for The Wish Co. [Show ALL your workings. Cost of Debt should be in market value and Cost of Equity should be calculated using Dividend Growth Model (DGM)]
Bond Coupon rate (% p.a.) Price (%) Maturity (years) Face value (£) 1 5.00 98 5 10,000,000 2 7.50 109 8 45,000,000 3 6.40 94 15.50 35,000,000 4 9.75 115 25 45,000,000Explanation / Answer
Bond
Coupon rate (% p.a.)
Price (%)
Maturity (years)
Face value (£)
Interest = face value*interest rate*1/2
Market value = face value*market price in % of par value
1
5
98
5
10,000,000
250000
9800000
2
7.5
109
8
45,000,000
1687500
49050000
3
6.4
94
15.5
35,000,000
1120000
32900000
4
9.75
115
25
45,000,000
1125000
51750000
Cost of Debt
Interest+(face value-market value)/period to maturity / (face value+market value)/2
semiannual rate of capital
Before tax annual cost of debt = semiannual rate*2*100
after tax cost of debt= before tax cost of debt*(1-tax rate)
Bond
1
250000+(10000000-9800000)/10 / (10000000+9800000)/2
270000/9900000
2.73%
5.45
3.82
2
1687500+(45000000-49050000)/16 / (45000000+49050000)/2
1434375/47025000
3.05%
6.10
4.27
3
1120000+(35000000-32900000)/30.5 / (35000000+32900000)/2
1188852/33950000
3.50%
7.00
4.90
4
1125000+(45000000-51750000)/50 / (45000000+51750000)/2
990000/48375000
2.05%
4.09
2.87
Bond
Market value
weight of debt
after tax cost of debt
weight of debt*after tax cost of debt
1
9800000
0.068293
3.82
0.26075388
2
49050000
0.341812
4.27
1.45965107
3
32900000
0.229268
4.90
1.12399239
4
51750000
0.360627
2.87
1.0332388
143500000
over all after tax cost of debt
3.88
cost of equity
(Expected dividend/market price)+growth rate
(2.16/30)+.08
15.20%
Expected dividend
2*1.08
2.16
cost of preferred stock
preferred dividend/market price
60/930
6.45%
weighted average cost of capital
Source
value
weight
cost of source
weight*cost of source
debt
143500000
0.319884
3.88
1.24039408
preferred
65100000
0.145118
6.45
0.93601204
equity
240000000
0.534998
15.2
8.13196612
448600000
overall cost of capital
sum of weight*cost of source
10.31
Bond
Coupon rate (% p.a.)
Price (%)
Maturity (years)
Face value (£)
Interest = face value*interest rate*1/2
Market value = face value*market price in % of par value
1
5
98
5
10,000,000
250000
9800000
2
7.5
109
8
45,000,000
1687500
49050000
3
6.4
94
15.5
35,000,000
1120000
32900000
4
9.75
115
25
45,000,000
1125000
51750000
Cost of Debt
Interest+(face value-market value)/period to maturity / (face value+market value)/2
semiannual rate of capital
Before tax annual cost of debt = semiannual rate*2*100
after tax cost of debt= before tax cost of debt*(1-tax rate)
Bond
1
250000+(10000000-9800000)/10 / (10000000+9800000)/2
270000/9900000
2.73%
5.45
3.82
2
1687500+(45000000-49050000)/16 / (45000000+49050000)/2
1434375/47025000
3.05%
6.10
4.27
3
1120000+(35000000-32900000)/30.5 / (35000000+32900000)/2
1188852/33950000
3.50%
7.00
4.90
4
1125000+(45000000-51750000)/50 / (45000000+51750000)/2
990000/48375000
2.05%
4.09
2.87
Bond
Market value
weight of debt
after tax cost of debt
weight of debt*after tax cost of debt
1
9800000
0.068293
3.82
0.26075388
2
49050000
0.341812
4.27
1.45965107
3
32900000
0.229268
4.90
1.12399239
4
51750000
0.360627
2.87
1.0332388
143500000
over all after tax cost of debt
3.88
cost of equity
(Expected dividend/market price)+growth rate
(2.16/30)+.08
15.20%
Expected dividend
2*1.08
2.16
cost of preferred stock
preferred dividend/market price
60/930
6.45%
weighted average cost of capital
Source
value
weight
cost of source
weight*cost of source
debt
143500000
0.319884
3.88
1.24039408
preferred
65100000
0.145118
6.45
0.93601204
equity
240000000
0.534998
15.2
8.13196612
448600000
overall cost of capital
sum of weight*cost of source
10.31
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