Bigwig Plc has been manufacturing children's clothes, women's dress and menswear for Marks and Spencer. Bigwig...

 

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Bigwig Plc has been manufacturing children's clothes, women's dress and menswear for Marks and Spencer. Bigwig Plc has a well- established cluster chain in Cambodia and India. The following information has been extracted from the latest statement of financial position in Bigwig Plc plc: Ordinary Shares (50p nominal value) Share Premium Account Capital Reserve 5% £1 Cumulative Preference Shares Bank Loan (2017) 7% Debentures (redeemable after 5 years) 6% Irredeemable Bond Total Capital £7m £2 m £ 0.4 m £5m £ 2.2 m £2 m £1m £19.6m The ordinary shares are currently trading cum div at 130p, but a dividend, of 5p, has just been declared. This is expected to grow in the next year. Preference shares are trading at 40p and has just gone ex div. The bank loan was secured on property at a fixed rate of 12% two years ago before financial crisis. (This is before taxation). The current cost of such capital remains the same. This is 10% greater than the return currently on offer for investment in government bonds. The debentures are trading at £102 ex int and will be redeemed in 6 years at a premium of £5. 6% Irredeemable Bonds are trading at £96 ex int per £100 bond General market information available advises that the corporate tax rate applicable to Bigwig Plc plc is 25% and their beta value is 1.2. The FT All share is currently offering a return of 12%. Share Premium Account Capital Reserve 5% £1 Cumulative Preference Shares Bank Loan (2017) 7% Debentures (redeemable after 5 years) 6% Irredeemable Bond Total Capital £2 m £ 0.4 m £ 5 m £ 2.2 m £2m £1m £19.6m The ordinary shares are currently trading cum div at 130p, but a dividend, of 5p, has just been declared. This is expected to grow in the next year. Preference shares are trading at 40p and has just gone ex div. The bank loan was secured on property at a fixed rate of 12% two years ago before financial crisis. (This is before taxation). The current cost of such capital remains the same. This is 10% greater than the return currently on offer for investment in government bonds. The debentures are trading at £102 ex int and will be redeemed in 6 years at a premium of £5. 6% Irredeemable Bonds are trading at £96 ex int per £100 bond General market information available advises that the corporate tax rate applicable to Bigwig Plc plc is 25% and their beta value is 1.2. The FT All share is currently offering a return of 12%. Required: (a) Calculate the weighted average cost of capital (WACC) for Bigwig Plc plc. (12 marks) Bigwig Plc has been manufacturing children's clothes, women's dress and menswear for Marks and Spencer. Bigwig Plc has a well- established cluster chain in Cambodia and India. The following information has been extracted from the latest statement of financial position in Bigwig Plc plc: Ordinary Shares (50p nominal value) Share Premium Account Capital Reserve 5% £1 Cumulative Preference Shares Bank Loan (2017) 7% Debentures (redeemable after 5 years) 6% Irredeemable Bond Total Capital £7m £2 m £ 0.4 m £5m £ 2.2 m £2 m £1m £19.6m The ordinary shares are currently trading cum div at 130p, but a dividend, of 5p, has just been declared. This is expected to grow in the next year. Preference shares are trading at 40p and has just gone ex div. The bank loan was secured on property at a fixed rate of 12% two years ago before financial crisis. (This is before taxation). The current cost of such capital remains the same. This is 10% greater than the return currently on offer for investment in government bonds. The debentures are trading at £102 ex int and will be redeemed in 6 years at a premium of £5. 6% Irredeemable Bonds are trading at £96 ex int per £100 bond General market information available advises that the corporate tax rate applicable to Bigwig Plc plc is 25% and their beta value is 1.2. The FT All share is currently offering a return of 12%. Share Premium Account Capital Reserve 5% £1 Cumulative Preference Shares Bank Loan (2017) 7% Debentures (redeemable after 5 years) 6% Irredeemable Bond Total Capital £2 m £ 0.4 m £ 5 m £ 2.2 m £2m £1m £19.6m The ordinary shares are currently trading cum div at 130p, but a dividend, of 5p, has just been declared. This is expected to grow in the next year. Preference shares are trading at 40p and has just gone ex div. The bank loan was secured on property at a fixed rate of 12% two years ago before financial crisis. (This is before taxation). The current cost of such capital remains the same. This is 10% greater than the return currently on offer for investment in government bonds. The debentures are trading at £102 ex int and will be redeemed in 6 years at a premium of £5. 6% Irredeemable Bonds are trading at £96 ex int per £100 bond General market information available advises that the corporate tax rate applicable to Bigwig Plc plc is 25% and their beta value is 1.2. The FT All share is currently offering a return of 12%. Required: (a) Calculate the weighted average cost of capital (WACC) for Bigwig Plc plc. (12 marks)

Answer rating: 100% (QA)

Here are the stepbystep calculations to determine the WACC for Bigwig Plc 1 Cost of equity Re Risk f... View the full answer