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Calculate the after-tax wacc

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Question - Rambo Retailing Ltd is trying to determine its cost of capital.

The company just paid a dividend of $1.40 and expects to achieve a growth rate of 3% p.a. on their ordinary share dividends. The current market price of the share is $15, while they were originally issued at a price of $12. The standard deviation of the stock is 6% and the is 0.7. The risk free rate is 4%.

The company has also issued bonds with a maturity of 20 years that pay annual coupons. The coupon rate is 8% and the bonds were issued with a face value of $1000 and have a current market price at $1000. There are presently 20,000 bonds on issue.

Preference shares have a market price of $90 and pay an annual dividend of 10%. The issue price of the preference shares was $100.

The debt to equity ratio of the company is 0.6. Of the equity, 65% is ordinary equity and 35% is preference equity.

The company tax rate is 30%

Required -

1. Calculate the after-tax WACC.

2. Can the manager of Rambo Retailing use this cost of capital to evaluate all current projects? Explain your answer. Answer in no more than two sentences.

Reference no: EM133165217

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