Speaking Ltd, is a company whose shareholders are residents of its country, and to whom it pays fully franked dividends, is considering various investments. To evaluate these possibilities management will need to find the Weighted Average Cost of Capital. The following information has been gathered which will apply to all projects.
a. Debentures currently outstanding were sold at a face value of $100 and a coupon rate of 11% per annum. A merchant banker suggested that a new issue would require a coupon rate of 16% per annum, to be fully subscribed at face value, with a seven year maturity. The outstanding debentures have seven years to maturity.
b. The current mortgage loan has 10 year remaining until maturity and the original terms of the loan taken out five years ago called for 6% per annum before tax interest on the reducing balance. A new loan is estimated to cost 12% per annum before tax on similar terms.
c. Preference shares were recently traded at $0.73, well below their $2 par value.
d. The last trade of ordinary shares was $0.95. The beta of Speaking’s equity has been calculated at 1.2. Government securities are currently yielding 12.5% per year and the market risk premium is 19% per annum.
e. The following information has been extracted from Speaking’s latest balance sheet and is considered to be an optimal mix of financing sources (in $’000):
Mortgage loan 2,000
Preference shares, 6%, $2 par 500
Shareholders’ funds Paid up capital ($1 par) 2,500
Determine the weighted average cost of capital.