Reference no: EM131282627
Question 1
Your boss wishes to calculate the firm's weighted cost of capital (WACC) and the following information has been given to you:
Number of ordinary shares = 5 million
Book value of 6% bond maturing in 2020 (in 5 years' time) = $0.5 million Yield-to-maturity of bond is currently 4.85%
Market price of ordinary shares = $0.65
Market price of bond (with a face value of $100) = $105 Beta = 1.3
Risk-free rate = 3.0% Market risk premium = 5.5% Tax rate = 17%
Additionally, she needs you to explain the circumstances under which WACC can be used for investment appraisal.
Calculate the firm's WACC.
Question 2
Citrix Limited, a company competing in the same industry as Vizz, is listed on the local stock exchange and its last traded price (ex-dividend) is $1.30 per share. Currently, its issued and paid-up ordinary share capital is $50 million and has a par value of 50 cents per share.
Recently, it financed its operations by issuing 50 million 8% perpetual preference shares, which have a nominal value of 50 cents per share. Dividends are paid annually and the ex- dividend market value of the preference shares is 48 cents per share.
Two years ago, Citrix issued 500,000 7% bonds (coupon paid semi-annually) that were redeemable in six years at their par value of $100 per bond. The current market price of the bonds is $103, and the yield to maturity is 6.14% annually.
Currently, its marginal tax rate is 15% per year and equity beta is 1.60. Also, the risk- free rate of return is 3% and the equity risk premium is 6% per year.
Calculate the following cost of capital for Citrix:
(a) Cost of equity
(b) Cost of preference shares
(c) The weighted average cost of capital on a market value weighted basis
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