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Yasawa Ltd is the Fijian subsidiary of a large New Zealand company.
Most of the shareholders are overseas residents who cannot utilise imputation credits. The company is interested in calculating its weighted average cost of capital and has presented you with the following data:
I. $600 000 can be borrowed from the bank for a term of 10 years. The bank will charge Yasawa Ltd an annual effective rate of 13% pa.
II. Preference shares have a market price of $8 and pay an annual dividend per share of $0.75. Flotation costs will be 3.9% of the issue price of $7.90.
III. The firm has $500 000 of retained earnings available for investments.
IV. Yasawa Ltd 's ordinary shares have a market value of $7.50 per share. The next dividend is expected to be $0.75. The current growth rate of ½% is expected to continue indefinitely. Flotation costs will be 2.8% for shares issued at $7.25 each.
Source $('000)Long-term debt 480Preference shares 240Ordinary shares 480
Required:
Problem 1: Calculate the appropriate WACC for Yasawa Ltd to use, assuming no retained earnings are available for investing in new projects.
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