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Weighted Average Cost of Capital (WACC)
The company has been investigating a number of projects but has been unable to accurately calculate an appropriate benchmark rate for measuring these projects. You have been supplied with the following information and asked to calculate the weighted average cost of capital (WACC) for the company.
Geotech Consulting
Statement of Financial Position (extract from 30 June 2010 accounts)
Common Stock par value $2.00 4,000,000
14% Preference Shares par value $3.00 3,000,000
12% Bonds semi-annual (face value $100) 2,000,000
Term Loan 350,000
Mortgage 700,000
Additional Information:
The ordinary shares are currently trading at $2.86 while the Preference shares are trading at $3.15.
Return on government bonds is 4%, the market risk premium 6% and the growth rate in dividends has been consistently 3% over the past five years. A consultant has estimated the company to have a beta of 1.3.
Corporate tax rate is 35%
The bonds originally had a 6 year term to maturity and were issued exactly two years ago.
The before tax return on similar risk bonds is 9%
Interest on the term loan is 10% and the Mortgage 9%.
Required;
Calculate the weighted average cost of capital for CTRL using the market valuation approach (show your workings).
Answer:
Need to know an answer and how do you get numbers
Weighted Average Cost of Capital (WACC)
The internal rate of return for the project is 13%. While this rate is higher than the market rate, the management would like to compare it to the company’s current cost of capital. You have been provided with the following information and asked to calculate the weight average cost of capital.
The company issued 2,000 six year semi-annual bonds two years ago with a face value of $1,000 and coupon rate of 8%. The bonds are currently trading at $1150. The company also have a 9% term loan with an outstanding principal of $750,000. The only other component of debt is a $1.2 million 7.5%…