Effective After Tax Weighted Average Cost of Capital Assignment

Author:

February 18th, 2020

james PLC one of the companies listed on the stock exchange wishes to calculate its updated weighted Average cost of capital for use in the investment appraisal process.

$’ Million

Issued shared capital ($100 shares 2,000

Share premium 1,300

Reserves 145

Share Holders funds 3,445

6% irredeemable Debentures 1,400

9% Redeemable Debentures 1,450

Bank loan 500

Total Long – Term liabilities 3,350

The current cumulative interest market value per $100 units is $103 and $105 for the 6% and 9% debentures respectively. The 9% denture is redeemable at par in 10 years’ time. The bank loan bears interest rate of 2% above the base rate (current base rate is 15%). The current ex-div market price of shares is $1,100 and a divided of $100 per share which is expected to grow at a rate of 5% per year has just been paid. The effective corporation tax rate for James PLC is 30%.

Required

(a) Calculate the effective after tax Weighted Average cost of Capital (WACC) for James PLC.

(b) Using the traditional theory of capital structure explain what would happen if the company took on additional debt finance. Get Finance homework help today

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