1 An examination of the 30 June 1996 balance sheet of Donna Transport Limited reveals the...

 

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1 An examination of the 30 June 1996 balance sheet of Donna Transport Limited reveals the following capital structure: Paid-up Capital (Ordinary Shares $3) Retained Earnings Preference Shares ($2) S (000's) 15,000 8,000 1,000 3,000 2,000 Bank Overdraft Accounts Payable Mortgage Bonds, $1,000 face value (13%) Debentures, $1,000 face value (10%) You are given the following additional information about the firm: Tax rate: 36% Mortgage bonds: market price per bond $1,000, matures 20 years from today, next interest payment due 31 December 1996 Debentures: market price per bond $935, 15 years from today, interest paid annually, and next payment due one year from now 5,000 4,000 Ordinary shares: per share market price $40, dividends paid annually, per share amount one year from now $4 and this amount expected to grow at 5 percent per year thereafter to infinity. Preference shares: currently traded at $1.25 per share and pay dividends of 9% per annum. Bank overdraft: rates are currently 15% per annum compounded daily. Clearly show the relevant cost of capital for each source of finance and compute the weighted average cost of capital for the Company. NOTE: The following information should be added to Q1 so that imputation can be incorporated into the question: a) the proportion of tax collected from the company that is claimed by shareholders is 0.6; b) ordinary dividends are fully franked, and c) preference dividends are not franked. 1 An examination of the 30 June 1996 balance sheet of Donna Transport Limited reveals the following capital structure: Paid-up Capital (Ordinary Shares $3) Retained Earnings Preference Shares ($2) S (000's) 15,000 8,000 1,000 3,000 2,000 Bank Overdraft Accounts Payable Mortgage Bonds, $1,000 face value (13%) Debentures, $1,000 face value (10%) You are given the following additional information about the firm: Tax rate: 36% Mortgage bonds: market price per bond $1,000, matures 20 years from today, next interest payment due 31 December 1996 Debentures: market price per bond $935, 15 years from today, interest paid annually, and next payment due one year from now 5,000 4,000 Ordinary shares: per share market price $40, dividends paid annually, per share amount one year from now $4 and this amount expected to grow at 5 percent per year thereafter to infinity. Preference shares: currently traded at $1.25 per share and pay dividends of 9% per annum. Bank overdraft: rates are currently 15% per annum compounded daily. Clearly show the relevant cost of capital for each source of finance and compute the weighted average cost of capital for the Company. NOTE: The following information should be added to Q1 so that imputation can be incorporated into the question: a) the proportion of tax collected from the company that is claimed by shareholders is 0.6; b) ordinary dividends are fully franked, and c) preference dividends are not franked.

Answer rating: 100% (QA)

To compute the weighted average cost of capital WACC for Donna Transport Limited we need to calculate the cost of each source of finance and then determine the weighted average based on the proportion ... View the full answer