Information concerning the capital structure of Agro Retailers is asfollows: Marketvalues Ownersequity Issued commonstock capital R4500000 Redemptionreserve
Question:
Information concerning the capital structure of Agro Retailers is as follows:
Market values | |
Owners’ equity | |
Issued common stock capital | R4 500 000 |
Redemption reserve | R1 000 000 |
Redeemable preference shares | R2 000 000 |
Retained earnings | R1 200 000 |
Long-term debt | |
Debentures | R3 500 000 |
• The current risk-free rate is 7,25%, while the current market portfolio return is 12,2%. The company's beta is 1.
• The redeemable preference share capital was issued at R5 per share and is redeemable in four years’ time at par value. An annual 10% dividend is paid at the end of each of the four years. The shares are currently trading at R5,50 per share.
• The 12% bonds are non-redeemable, with a par value of R120, and are currently trading at a 10%premium.
• The company tax rate is assumed to be 28%.
REQUIRED:
Calculate the cost of:
(a) Ordinary shares
(b) Preference shares
(c) Debt
Using the table below and the given market values of every form of capital, calculate the weighted averagecost of capital (WACC) for Agro.
Capital source | Market value | Weighting | Cost | Weighted cost |
Ordinary shares | ||||
Preference shares | ||||
Debt | ||||
Total value |
Provide a brief discussion of no more than 15 lines a regarding the use of WACC as part of capital structure calculations of a company.
Financial Reporting and Analysis
ISBN: 978-0078025679
6th edition
Authors: Flawrence Revsine, Daniel Collins, Bruce, Mittelstaedt, Leon