Reference no: EM132678229

Weighted Average Cost of Capital

The capital structure of Minelli Enterprises Limited as at 31 March 2020 is as follows:

000 Ordinary shares (par value $1.50) 60,000 5.5% (post-tax)

Preference Shares (par value $2.20) 8,800 6.5% (pre-tax)

Bonds semi-annual (par value $1000) 80,000

Term Loan (interest rate 4.25% per annum) 6,500

Additional Information:

1. The ordinary shares are currently trading at $1.95 while the preference shares are trading at $2.45.
2. Return on government bonds is 1.25%, the market risk premium 4.25%. A consultant has estimated the company to have a beta of 1.30.
3. The company tax rate is 28%
4. The bonds initially had a 5-year term to maturity and were issued exactly three years ago and would be redeemed at par.
5. The current market value of the bond is $ 955.

Required:

Problem 1: Bond ratings are susceptible to the COVID-19 pandemic. Discuss.

Problem 2: Calculate the post-tax weighted average cost of capital (WACC) for Minelli Enterprises Ltd using the market valuation approach (show all workings).