Question: Burg plc is financed through bonds and ordinary shares. The bonds were issued five years ago at a par value of 100 (total funds

Burg plc is financed through bonds and ordinary shares. The bonds were issued five years ago at a par value of £ 100 (total funds raised £5m). They carry an annual coupon of per cent, are due to be redeemed in four years and are currently trading at £105.

The company’s shares have a market value of £4m, the return on risk-free government securities is 8 per cent and the risk premium for an average-risk share has been 5 per cent, burg’s shares have a lower than average risk and its historic beta as measured by the co-movement of its shares and the market index correctly reflects the risk adjustment necessary to the average risk-premium-this is 0.85. The corporate tax rate is 0.30 per cent. Burg has a net asset figure of £3.5m showing in its balance sheet.

Required:

Calculate the cost of debt capital. Calculate the cost of equity capital. Calculate the weighted average cost of capital.

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