Question 2. Consider the following information: Extract of the Balance Sheet as at 30 June 2021: Issued Capital $ Millio
Posted: Sun Apr 17, 2022 6:24 pm
Question 2. Consider the following information:
Extract of the Balance Sheet
as at 30 June 2021:
Issued Capital
$ Million
6,000,000
Ordinary shares of $1 fully paid
6.0
3,000,000
8% Preference Shares of $1.00 fully
paid
4.0
Current Liabilities and
Provisions
Bank Overdraft:
5.0
Trade Creditors:
5.0
Unsecured Notes:
8.0
Non-Current Liabilities
Debentures:
12.0
Term Loans:
10.0
Mortgage:
24.0
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 short-term sources 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%
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% p.a, and the average market return is 9.5% p.a.
7. The current interest rate on the bank overdraft is 6% per
annum and the average market return is 9.5% per annum.
8. The current interest rate on the bank overdraft is 6% per
annum. 9. Interest on all debt securities is paid twice yearly and
the corporate tax rate is 33 percent.
Required: (2a) Identify the various items that need to be
included in the capital base to calculate the WACC.
(2b) 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.
(2c) Calculate the required after-tax effective rate of return
of each item identified in (a).
(2d) Calculate the WACC.
Extract of the Balance Sheet
as at 30 June 2021:
Issued Capital
$ Million
6,000,000
Ordinary shares of $1 fully paid
6.0
3,000,000
8% Preference Shares of $1.00 fully
paid
4.0
Current Liabilities and
Provisions
Bank Overdraft:
5.0
Trade Creditors:
5.0
Unsecured Notes:
8.0
Non-Current Liabilities
Debentures:
12.0
Term Loans:
10.0
Mortgage:
24.0
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 short-term sources 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%
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% p.a, and the average market return is 9.5% p.a.
7. The current interest rate on the bank overdraft is 6% per
annum and the average market return is 9.5% per annum.
8. The current interest rate on the bank overdraft is 6% per
annum. 9. Interest on all debt securities is paid twice yearly and
the corporate tax rate is 33 percent.
Required: (2a) Identify the various items that need to be
included in the capital base to calculate the WACC.
(2b) 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.
(2c) Calculate the required after-tax effective rate of return
of each item identified in (a).
(2d) Calculate the WACC.