Company KPC has an average trade receivables of $6,500,000 and annual sales of $14.5 million. It is

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Question:

Company KPC has an average trade receivables of $6,500,000 and annual sales of $14.5 million. It is considering the use of factoring given that this would result in a reduction in credit control costs of $970,000 per annum. The factoring house charges a fee of 1.6% of sales. It will provide an advance to the company of 86% of its receivables and will charge interest on this advance of 13 % per annum.

Required: Assess whether it is financially beneficial for company KPC to enter into this factoring arrangement.

A Toys Company has 2.5 million shares in issue. The current market price is $34 per share. The company’s debt is publicly traded on the London Stock Exchange and the most recent quote for its price was at 88% of face value. The debt has a total face value of $ 10 million and the company’s credit risk premium is currently 2.9%. The risk-free rate is 3.8% and the equity market risk premium is 7.4%. The company’s beta is estimated at 1.4 and its corporate tax rate is 31%.

Required: Calculate the company’s WACC.