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Calculate the market value weighted-average cost of capital

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Reference no: EM132797065

Xolani Co wishes to calculate its weighted-average cost of capital and the following information relates to the company at the current time:

Number of ordinary shares                  20 million

Book value of 7% convertible debt      R290 million

Book value of 8% bank loans            R20 million

Market price of ordinary shares              R55.00 per share

Market value of convertible debt       R107.11 per R100 bond

Equity beta of Xolani Co.                   1.2

Risk-free rate of return                      4.7%

Equity risk premium                        6.5%

Rate of taxation                              30%

Xolani Co expects share prices to rise in the future at an average rate of 6% per year. The convertible debt can be redeemed at par in eight years' time or converted in six years' time into 1.5 shares of Xolani Co per R100 bond.

Required:

Problem (a) Calculate the market value weighted-average cost of capital of Xolani Co. State clearly any assumptions that you can make.

Problem (b) Discuss the circumstances under which weighted-average cost of capital can be used in investment appraisal.

Problem (c) Discuss whether the dividend growth model or capital assets pricing model offers the better estimate of the cost of equity of a company.

Reference no: EM132797065

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