Question [3] Q.3 Alpha Building Group plc is financed through bonds and ordinary shares. The bonds were issued five years ago at a par value of 100 (total funds raised 4.7m). They carry an annual coupon of 10 per cent, are due to be redeemed in four years and are currently trading at 105. The company's shares have a market value of 4m, the return on risk-free government securities is 8 per cent and the risk premium for an average-risk share has been 5 percent. Alpha Building Group's shares have a lower than average risk and its historic beta as measured by the co-movement of its shares and the market index correctly reflects the risk adjustment necessary to the average risk premium - this is 0.85. The corporate tax rate is 19 per cent. Alpha Building Group plc has a net asset figure of 3.5m showing on its balance sheet. (a) Calculate the cost of debt capital. (6 marks) (b) Calculate the cost of equity capital. (6 marks) (c) Calculate the weighted average cost of capital (WACC). Using WACC = (Cost of Equity Proportion of Equity] + [Taxed Cost of Debt x Proportion of Debt] (6 marks) (d) Discuss whether Alpha Building Group plc should use the WACC for all future projects and Strategic Business Units. (6 marks) (e) Discuss how capital structure influences a company's cost of capital. (9.33 marks) Total (33.33] marks 5% Present Value Table Present value of 1 in *w* years at discount rate, r. Discount rate (1) Years (n) 1% 2% 4% 6% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0792 0.763 0.735 0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 1 N 3 4 5 6 6 7 8 7 0.942 0.933 0.923 0.914 0.905 0.888 0.871 0.853 0.837 0.820 0.837 0.790 0.746 0.813 0.760 0.711 0.789 0.731 0.677 0.766 0.703 0.645 0.744 0.676 0.614 0.705 0.666 0.630 0.596 0.564 0.665 0.623 0.583 0.547 0.513 0.627 0.582 0.540 0.502 0.467 0.592 0.544 0.500 0.460 0.424 0.558 0.508 0.463 0.422 0.386 8 9 10 10 11 11 12 0.896 0.887 0.879 0.870 0.861 13 0.804 0.788 0.773 0.758 0.743 0.722 0.701 0.681 0.661 0.642 0.650 0.625 0.601 0.577 0.555 0.585 0.527 0.475 0.429 0.388 0.350 0.557 0.497 0.444 0.397 0.356 0.319 0.530 0.469 0.415 0.368 0.326 0.290 0.505 0.442 0.388 0.340 0.299 0.263 0.481 0.417 0.362 0.315 0.275 0.239 12 13 14 14 15 15 Years (n) 1 2 3 1 2. 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 UN 4 0.507 6 7 0.535 482 0.434 0.391 0.352 7 B 9 10 0.480 0.425 0.376 0.333 0.295 0.452 0.404 0.361 0.322 0.456 0.400 0.351 0.308 0.270 8 0.432 0.410 0.390 0.370 0.352 0.335 0.376 0.354 0.333 0.314 0.296 0.279 0.327 0.305 0.285 0.266 0.249 0.233 0.284 0.263 0.243 0.225 0.209 0.194 0.247 0.227 0.208 0.191 0.176 0.162 9 10 11 12 13 11 12 0.317 0.286 0.258 0.232 0.209 0.287 0.257 0.229 0.205 0.183 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 13 14 14 15 15 Annuity Table Present value of 1 receivable at the end of each year for "w" years at discount rate,r. Discount rate() Years (n) 1% 2% 3% 5% 6% 7% 8% 9% 10% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4,452 4.329 4212 4.100 3.993 3.890 3.791 1 2 3 4 6 7 6 7 8 9 10 5.795 5.601 5.417 5.242 5.076 6.728 6.472 6.230 6.002 5.786 7.652 7.325 7.020 6.733 6.463 8.566 8.162 7.786 7.435 7.108 9.471 8.983 8.530 8.111 7.722 4.917 5.582 6.210 6.802 7.360 4.767 5.389 5.971 6.515 7.024 4.623 5.206 5.747 6.247 6.710 4.486 4.355 5.033 4.868 5.535 5.335 5.995 5.759 6.418 6.145 8 9 10 11 11 12 10.37 9.787 9.253 11.26 10.58 9.954 12.13 11.35 10.63 13.00 12.11 11.30 13.87 12.85 11.94 13 8.760 8.306 9.385 8.863 9.986 9.394 10.56 9.899 11.12 10.38 7.887 8.384 8.853 9.295 9.712 7.499 7.943 8.358 8.745 9.108 7.139 6.805 6.495 7.536 7.161 6.814 7.904 7.487 7.103 8.244 7.786 7.367 8.559 8.061 7.606 12 13 14 15 15 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% Years (n) 1 2 3 1 2 0.901 0.893 0.885 0.877 0.870 1.713 1.690 1.668 1.647 1.626 2.444 2.402 2.361 2.322 2.283 3.102 3.037 2.974 2.914 2.855 3.696 3.605 3.517 3.433 3.352 0.862 1.605 2.246 2.798 3.274 0.855 1.585 2.210 2.743 3.199 0.847 1.566 2.174 2.690 3.127 0.840 1.547 2.140 2.639 3.058 0.833 1.528 2.106 2.589 2.991 4 5 5 6 7 8 9 10 4.231 4.111 3.998 3.889 3.784 4.712 4.564 4.423 4.288 4.160 5.146 4.968 4.799 4.639 4.487 5.537 5.328 5.132 4.946 4.772 5.889 5.650 5.426 5.216 5.019 3.685 4.039 4.344 4.607 4.833 3.589 3.922 4.207 4.451 4.659 3.498 3.410 3.326 3.812 3.706 3.605 4.078 3.954 3.837 4.303 4.163 4.031 4.494 4.339 4.192 10 11 12 13 14 15 6.207 5.938 5.687 5.453 5.234 6.492 6.194 5.918 5.660 5.421 6.750 6.424 6.122 5.842 5.583 6.982 6.628 6.302 6.002 5.724 7.191 6.811 6.462 6.142 5.847 5.029 5.197 5.342 5.468 5.575 4.836 4.988 5.118 5.229 5.324 4.656 4.793 4.910 5.008 5.092 4.486 4.611 4.715 4.802 4.876 4.327 4.439 4.533 4.611 4.675 11 12 13 14 15