Blue plc is trying to introduce an improved method of accessing investment projects using discounted cash...

  

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Blue plc is trying to introduce an improved method of accessing investment projects using discounted cash flow techniques. For this, it has to obtain a cost of capital to use as a discount rate. The finance department has assembled the following information: Financial position as at 30th June 2021 Notes €000 €000 €000 Non-current assets: 872 Current assets: Inventory Accounts receivable Cash Current liabilities: 240 300 30 573 Accounts payable 120 Bank overdraft 200 320 Net current assets 253 Total assets less current liabilities 1125 Long-term liabilities: 12% redeemable bonds (i) 500 9% convertible bonds (ii) 250 750 375 Capital and reserves: Ordinary shares, €1 each (iii) Reserves 225 150 375 Notes I. II. III. IV. The 12 per cent bonds are redeemable in five years at par. The current cum- interest market price of the bonds is €126. The 9 per cent bonds will be redeemed in three years at €154 per bond. The current ex-interest market price of the bonds is €119 per €100 bond. The current ex-dividend market price of the ordinary shares of Blue plc is €3.14. Both dividends and share price are expected to increase by 7 per cent per year for the foreseeable future. Corporation tax is at a rate of 30 per cent. Required: Calculate the cost of debt of the 12 per cent redeemable bonds. Q 2(b) Calculate the cost of debt of the bonds Q 2(c) [4 Marks] [4 Marks] If a dividend of 35c per ordinary share has just been paid, calculate the cost of equity. Q 2(d) [6 Marks] Calculate the weighted average after-tax cost of capital of Blue plc. Q 2(e) [4 Marks] The calculation of the WACC is straightforward in theory, but difficult in practice. Outline any possible difficulties that might be experienced when trying to calculate the WACC Blue plc is trying to introduce an improved method of accessing investment projects using discounted cash flow techniques. For this, it has to obtain a cost of capital to use as a discount rate. The finance department has assembled the following information: Financial position as at 30th June 2021 Notes €000 €000 €000 Non-current assets: 872 Current assets: Inventory Accounts receivable Cash Current liabilities: 240 300 30 573 Accounts payable 120 Bank overdraft 200 320 Net current assets 253 Total assets less current liabilities 1125 Long-term liabilities: 12% redeemable bonds (i) 500 9% convertible bonds (ii) 250 750 375 Capital and reserves: Ordinary shares, €1 each (iii) Reserves 225 150 375 Notes I. II. III. IV. The 12 per cent bonds are redeemable in five years at par. The current cum- interest market price of the bonds is €126. The 9 per cent bonds will be redeemed in three years at €154 per bond. The current ex-interest market price of the bonds is €119 per €100 bond. The current ex-dividend market price of the ordinary shares of Blue plc is €3.14. Both dividends and share price are expected to increase by 7 per cent per year for the foreseeable future. Corporation tax is at a rate of 30 per cent. Required: Calculate the cost of debt of the 12 per cent redeemable bonds. Q 2(b) Calculate the cost of debt of the bonds Q 2(c) [4 Marks] [4 Marks] If a dividend of 35c per ordinary share has just been paid, calculate the cost of equity. Q 2(d) [6 Marks] Calculate the weighted average after-tax cost of capital of Blue plc. Q 2(e) [4 Marks] The calculation of the WACC is straightforward in theory, but difficult in practice. Outline any possible difficulties that might be experienced when trying to calculate the WACC

Answer rating: 100% (QA)

To calculate the cost of debt of the 12 redeemable bonds Cost of Debt Interest Payment Redemption Va... View the full answer