Question $5$

Local Mail Plc$.$ has the following capital structure:

Ordinary Shares $($par value $0\mathrm{.}20$per share$)5\mathrm{.}8$m

$3\mathrm{.}5\%$ Preference shares $1\mathrm{.}7$m

$6\mathrm{.}2\%$ Debentures $($non$-$redeemable$)13\mathrm{.}5$m

Bank Loan $($long term$)12\mathrm{.}0$m

The current share prices are $2\mathrm{.}64$ per ordinary share and $1\mathrm{.}07$ per preference share. The

recent dividend paid was $0\mathrm{.}40$ per share and dividends are expected to grow at a rate of

$3\mathrm{.}5\%$ per year into the future. The current market price of the debentures is $1\mathrm{.}034.$ The

company has a corporation tax rate of $12\mathrm{.}5\%.$ The interest cost of the bank loan has been

fixed at $5\mathrm{.}8\%$ p$.$a$.$

Required:

a$.$ Compute the weighted average cost of capital $($WACC$)$ for the company. $(15$ marks$)$

b$.$ Compute the WACC using the CAP$-$M approach for ordinary shares where the

expected future returns from the market are $10\mathrm{.}3\%$ and the risk$-$free rate on

government securities is $2\mathrm{.}1\%$ and the company$$s Beta is $0\mathrm{.}96.$