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WACC Problem MBA

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293 views1 page

WACC Problem MBA

Uploaded by

m150
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
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Download as docx, pdf, or txt
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Consider the following information:

Extract of Balance Sheet as at 30 June 2XXX


$ (millions)
Issued Capital

6,000,000 Ordinary Shares of $1.00 fully paid 6.00


3,000,000 8% Preference Shares of $1.00 fully paid 3.00

Current Liabilities and Provisions


Bank Overdraft 5.00
Trade Creditors 5.00
Unsecured Notes 8.00
Non-Current Liabilities
Debentures 12.00
Term Loans 10.00
Mortgage 24.00

You also have the following additional information available to you:

1. Term loans have a current interest rate of 6% p.a., but were negotiated at
an interest rate of 9% p.a. and are repayable in full in four years time.
Servicing the term loans consists of regular twice a year interest payments
with the principal repaid at maturity
2. Unsecured notes will mature in five months and will not be replaced. They
are a short-term source of funds not typical of the firm. They have a current
interest rate of 5.5% p.a.
3. Debentures have a coupon interest rate of 10% p.a. and could be re-issued at
the present time at an interest rate of 8.0% p.a. The debentures will be
redeemed at their face value in four years time.
4. The mortgage loan is repayable in six years’ time and its current interest rate
is 7.0% p.a. It was negotiated at 12.0% p.a..
5. The company’s preference shares are currently trading at $2.50. The
company’s ordinary shares are trading at $4.00.
6. Scully Ltd. has a beta of 1.4, the risk-free rate of return is 6.5 percent p.a.,
and the average market return is 9.5% p.a.
7. The current interest rate on the bank overdraft is 6.0% per annum.
8. Interest on all debt securities is paid twice yearly and the corporate tax rate
is 33 percent

Required:

a) Identify the various items that need to be included in the capital base to
calculate the WACC.

b) Calculate the market value of the various items identified in (a), the value
of the firm and the relative weight of each item in the firm’s capital structure.

c) Calculate the required after-tax effective rate of return of each item


identified in (a)

d) Calculate the WACC.

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