Consign Plc is considering expanding and therefore wants to invest in a new piece of machinery costing £1 million. In order to do this, it will take out a long term bank loan at an interest rate of 8%.

Currently it has 2 million shares in issue at a share price of £3.20. It has a beta value of 1.126.
The risk free rate of return is 4% and the market premium is 7%.
It also has 500,000 6% preference shares, with a nominal value of £1 and a share price of £0.86.
Its 7% redeemable bond has a book value of £2 million and is to be redeemed in 7 years’ time at a premium of 4%. Its current market value is £105.

The current tax rate is 20%.

Requirements:
Calculate the market value after-tax weighted average cost of capital (WACC) of Consign Plc in the following circumstances:
Before the new bank loan is issued;
After the new bank loan is issued.
Describe how the Dividend Valuation Model is used to calculate the cost of equity and two limitations of this theory.

Answer rating: 100% (QA)

Answer a Market value aftertax WACC I before a new bank loan is issued Current cost of equity ... View the full answer