UCW Co is a listed company selling computer software. Its profit before interest and tax has fallen from $$5$ million to $$1$ million in the last year, and its current financial position is as follows:

$$000$ $$000$

Non$-$current assets

Property, plant, and equipment $3,000$

Intangible assets $8,50011,500$

Current assets

Inventory $4,100$

Trade receivables $11,10015,200$

Total assets $26,700$

Current liabilities

Trade payables $5,200$

Overdraft $3,5008,700$

Equity

Ordinary shares $11,000$

Paid in capital $7,00018,000$

$26,700$

Its bank has advised UCW Co that the current overdraft limit of $$4\mathrm{.}5$ million will be reduced to $$500,000$ in two months. The finance director of UCW Co has been unable to find another bank willing to offer alternative overdraft facilities and is planning to issue bonds on the stock market to finance the reduction of the overdraft.

The bonds would be issued at their par value of $$100$ per bond and pay interest of $9\%$ per year, payable at the end of each year. The bonds would be redeemable at a $10\%$ premium to their par value after ten years. The finance director hopes to raise $$4$ million from the bond issue.

The ordinary shares of UCW Co have a par value of $$100$ per share and a current market value of $$410$ per share.

The cost of equity of UCW Co is $12\%$ per year, and the current interest rate on the overdraft is $5\%$ per year. Taxation is at an annual rate of $30\%.$

Other financial information:

Average gearing of sector $($debt$/$equity$,$ market value basis$)$: $10\%$

Average interest coverage ratio of the sector: $8$ times

Required:

$($a$)$ Calculate the after$$tax cost of debt of the $9\%$ bonds.

$($b$)$ Calculate and comment on the effect of the bond issue on the weighted average cost of capital of UCW Co$,$ clearly stating any assumptions you make.

$($c$)$ Calculate the effect of using the bond issue to finance the reduction in the overdraft on

$($i$)$ the interest coverage ratio.

$($ii$)$ gearing.

$($d$)$ Evaluate the proposal to use the bond issue to finance the reduction in the overdraft and discuss alternative sources of finance that could be considered by UCW Co$,$ given its current financial position.

$($e$)$ Evaluate the financial situation of the business, and make investment advice