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Homework answers / question archive / Alpha LTD has the following data: $,000 Ordinary share capital of $1 6,000 each Retained profits 3,000 3% Preference shares of $1 1,000 each 6% Debentures 4,000 Ordinary shares are quoted at 147€ The company is 1
Alpha LTD has the following data: $,000 Ordinary share capital of $1 6,000 each Retained profits 3,000 3% Preference shares of $1 1,000 each 6% Debentures 4,000 Ordinary shares are quoted at 147€ The company is 1.2 and the risk free rate is estimated to be 4%, the market risk premium is 8% Preference shares are quoted at 76¢ Debentures are irredeemable and are quoted at $99 (per $100) tax is 20% Calculate the weighted average cost of capital?
1.In order to calculate WACC market value need to be calculated
| given value in 000$(A) | Market rate(B) | Market value in 000$ | Proportion in market value |
| 6000 | 147 per $ | =6000*147=882000 | =882000/997600=88.41% |
| 1000 | 76 per $ | =1000*76=76000 | =76000/997600=7.62% |
| 4000 | 99$ per 100$ | =4000/100*99=39600 | =39600/997600=3.97% |
| Market value of company | 997600$ |
2 Calculating cost of equity Ke=risk free rate Rf + Beta*(Rm-Rf) Risk premium
=4%+1.2*(8%)=13.6%
3. Given cost of preference shares Kp=3%
4. Given cost of preference shares Kd=6%
5 WACC=Equity portion in market value of company*cost of equity+preference share portion in market value of company*cost of preference shares+debentures portion in market value of company*cost of debentures*(1-tax rate)
=88.41%*13.6%+7.62%*3%+3.97%*6%*(1-20%)
=WACC=12.443%
