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Calculation of the weighted average cost of capital
Calculation
of the weighted average cost of capital
Strummer
plc is currently trying to calculate its weighted average cost of
capital. As the company’s finance director, you have been asked to
perform the necessary calculations, using both book values and market
values. You have the following information:
| Balance sheet as at 31 December |
|
| Fixed assets |
£000 |
| Current assets |
445 |
| Current liabilities |
185 |
| 11% bonds (redeemable in 5 years) |
(110) |
| 10% irredeemable bonds |
(80) |
| Bank loans |
(95) |
| (60) | |
| 285 | |
| Ordinary shares (25p par value) |
90 |
| 9% preference shares (£1 par value) |
50 |
| Reserves | 145 |
| 285 |
1
The current dividend, shortly to be paid, is 20p per share. Dividends
in the future are expected to grow at a rate of 5 per cent per year.
2
Corporation tax currently stands at 30 per cent.
3
The interest rate on bank borrowings currently stands at 12.6 per
cent.
4
Stock market prices as at 31 December (all ex-dividend or
ex-interest):
| Ordinary shares: |
£1.76 |
| Preference shares: |
67p |
| 11% bond: |
£95 per £100 bond |
| 10% irredeemable bond: |
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