IRQ Co has recently taken out a new variable rate bank loan to fund an expansion programme into the Middle East. The capital structure of the company is now as follows:
$400m par value of 50c shares trading at $2.30 – IRQ Co has an equity beta of 1.1.
$600m par value of 6% irredeemable loan notes trading at $107.
$100m variable rate bank loan – the current interest charge is 5%.
The directors of IRQ Co are keen to know what the weighted average cost of capital has now become in order to evaluate projects the company is considering. The expansion into the Middle East is progressing well and further expansion in the future is likely. During their trips to the Middle East a number of key clients and contacts have suggested that IRQ Co should consider the use of Islamic Finance for any future expansion.
The risk free rate is 4% and the market premium is 7%. Corporation tax is 28%.
REQUIRED:
a) Calculate the WACC of IRQ Co.
b) Explain the key principles of Islamic Finance and describe how any future variable rate bank loan could be structured under the principles of Islamic Finance.

Answer rating: 100% (QA)

a To calculate the weighted average cost of capital WACC for IRQ Co we need to determine the cost of each component of the capital structure and weight them based on their proportion in the total capi... View the full answer