Calculate The Company's Weighted Average Cost Of Capital

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Question 1 Calculate the Company’s Weighted Average Cost of Capital

Bank Overdraft

EAR = (1+i/n )^n - 1

(1 + 0.08/12) ^ 12 -1 = 0.0830

Cost of Bank overdraft: = EAR (1-t)

= 0.830 (1-0.30)

= 0.0581

Debentures

Current market price = $309.29

Face value = $300.00

Annual coupon rate = 13.5% ( paid half yearly)

Further flotation cost ( if any) = $1.50

(300* 13.5%) = 40.5/2 = 20.25

Present value of annuity = $20.25

Pmt = $20.25

MP= Pmt * 1 – ( 1)/ (1+i)^n i

20.25 * 1 – 1/ ( 1+ 0.00675)^ 14 0.0675

= $ 179.78

Discount back the face value to 0

= FV….. ( 1+i)^n

= 300.00 = $120.21
(1+0.0675)^14

EAR = (1+6.4084%) ^ 2 -1 = .1323

Cost of debt = EAR ( 1- t ) .1323 ( 1-0.30) = 0.0926

Cost of Preference Shares (Keps) = Dividend Market Price

1.10 = 0.1358024 8.10

Dividend per share= 275000 = $1.10 250000

Cost of Ordinary Share Capital (Keos) = D 0 * ( 1+G) + G MP

Dividend per share ( D0)= 1125000 = 0.15 750000

= 0.15(1+0.06) + 0.06 =0.150857

1.75 Calculation of Weighted Average Cost of Capital

|Long Term Debt |MV |Weight |Cost |WAC |
| | | | | |
|Bank Overdraft |1000000 |0.0474 |0.581 |0.0028 |
|Debentures |4948640 |0.2345 |0.0926 |0.0217 |
|Ordinary Shares |13125000 |0.6221 |0.1508 |0.0938 |
|Preference shares |2025000 |0.096 |0.1358 |0.013 |
| |21098640 | | |0.1313 |

Notes

Debentures = 16000 * 309.29 = 4948640

Ordinary Shares = 7500000* 1.75 = 13125000

Preference share capital = 2500000 * 8.10= 2025000

Growth rate of 6% is assumed from the dividends proceedings of 4 years (in case of ordinary shares.)

Ques 2: Initiative A: Calculate the Net Present Value and Internal Rate of Return for the three alternatives and advise management.

Large plant high demand

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Large Plant Low Demand

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Small Plant High Demand

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Small Plant Low Demand

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Expanded Plant High Demand

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Expanded Plant Low Demand

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In this part of the question management has three alternatives and it will go with the best one. In need to know which is the best one we have to calculate net present values and internal rate of return of all the three alternatives as the initial outlay and cash inflow for the respective periods are given. But as these inflows involve time value of money so we need to discount it to the present value so that we can judge which alternative is the best one. That’s why we calculate net present values and internal rate of returns.
Net present value: it is a capital budgeting technique defined as the present value of the project’s annual net cash flows less the project’s
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