Required:

a) Calculate the Weighted Average Cost of Capital for Joncat ple (WACC).

b) Explain the advantages and disadvantages of using WACC for calculating discount rate that is used for investment appraisal purposes.

c) If Joncat were raising finance for a new project discuss the options available and recommend an appropriate source of finance. 

 

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Joncat plc runs a chain of children's book stores around Ireland. The following table shows its balance sheets as of 31st December 2014. ASSETS Non-Current Assets Buildings Land 855,000 1,250,000 Current Assets Inventory Cash Equivalents Accounts receivable Other assets EQUITY & LIABILITIES Capital and Reserves 95,000 85,000 124,000 93,500 397,500 2,502,500 Ordinary share capital 972,000 Non-current liabilities Bond 1,000,000 Preference Shares 452,000 Current Liabilities Accounts payable 78,500 2,502,500 i. ii. Additional information Joncat plc has 1.00 ordinary shares which are currently being traded at 1.64 and shareholders expect a 13% return. For WACC calculations Joncat plc uses book value of debt. iii. Joncat plc pays corporation tax at 25%. iv. The 8% bond is redeemable in 20 years. Preference shareholders get a return of 11%. Joncat plc runs a chain of children's book stores around Ireland. The following table shows its balance sheets as of 31st December 2014. ASSETS Non-Current Assets Buildings Land 855,000 1,250,000 Current Assets Inventory Cash Equivalents Accounts receivable Other assets EQUITY & LIABILITIES Capital and Reserves 95,000 85,000 124,000 93,500 397,500 2,502,500 Ordinary share capital 972,000 Non-current liabilities Bond 1,000,000 Preference Shares 452,000 Current Liabilities Accounts payable 78,500 2,502,500 i. ii. Additional information Joncat plc has 1.00 ordinary shares which are currently being traded at 1.64 and shareholders expect a 13% return. For WACC calculations Joncat plc uses book value of debt. iii. Joncat plc pays corporation tax at 25%. iv. The 8% bond is redeemable in 20 years. Preference shareholders get a return of 11%.

Answer rating: 100% (QA)

Answer a Calculation of Weighted Average Cost of Capital WACC for Joncat plc To calculate the WACC we need to determine the cost of each source of capital and then weight them based on their respectiv... View the full answer