Kiera was considering the acquisition of a chain of extended care facilities and wanted to estimate its
Question:
Kiera was considering the acquisition of a chain of extended care facilities and wanted to estimate its own Weighted Average Cost of Capital (WACC) as a guide to the cost of capital for the acquisition.
Kiera’s capital structure consists of the following:
Debt (Market value=RM100 million)
Preference Shares (Market value=RM 60 million)
Ordinary Shares (Market value=RM240 million)
Kiera contacted the firm’s investment banker to get an estimate of the firm’s current cost of financing, it would have to pay lenders 6 percent. The preference share currently demands a 10 percent rate of return, and ordinary shareholders demand 14 percent. The tax rate is 30 percent.
Required:
a) Calculate the weightage of each financing. (3 marks)
b) Sketch a bar chart to present the after-tax cost of finance. (5 marks)
c) Sketch a pie chart to present capital structure weights. (4 marks)
d) Calculate the Weighted Average Cost of Capital (WACC). (4 marks)
e) Comment on the firm’s Weighted Average Cost of Capital (WACC). (3 marks)
f) Discuss THREE (3) uses of Weighted Average Cost of Capital (WACC). (6 marks)
Corporate Finance A Focused Approach
ISBN: 978-1305637108
6th edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham