AM Co has $3m of 25c ordinary shares which are trading at $1.80 each. Soon, the dividend for the year is expected to be paid and the price of the share is expected to be $1.60 thereafter. The company also has $9m par value of 12% debentures which are redeemable at a premium of 6% in 5 years. These debentures are currently trading at $106. The company has an accounting rate of return of 9% and retains 60% of its available profits. The Company also has &1.5m bank loan of 8% payable in four years. Corporation Tax is 28%.

Required.

a)Calculate the Weighted Average Cost of Capital (WACC) for AM Co.

b) Private businesses operate in the same economic environment as the government. The government uses different tools/policies to control the economy in order to achieve its desired objectives which objectives may not be the same as those of the businesses. The Finance managers of private businesses should be aware of these policies. Discuss clearly, any four different economic policies that the government uses to achieve its objectives of, and discuss how these policies are likely to impact on businesses.

Answer rating: 100% (QA)

a To calculate the Weighted Average Cost of Capital WACC for AM Co we need to consider the cost of equity the cost of debt and the companys tax rate H... View the full answer