An extract from the Statement of Financial Position as at 31 March 2012 for Easy FM...
An extract from the Statement of Financial Position as at 31 March 2012 for Easy
FM Radio Station is as follows:
6% Secured Bonds (par $1000) $ 400,000
Long Term Loans $ 500,000
7% Preference Shares (par $2) $ 250,000
Issued & Paid up ordinary shares ($1 par) $1,000,000
Retained Earnings $2,350,000
Other information:
The current market price for the bonds that will mature on 31 March 2019 is $875 each.
The interest rate on an equivalent long term loan available in the market today is 9%
The preference shares are currently trading at $1.95
The ordinary shares are currently trading at $2.65
The dividends per ordinary share have been as follows
2008 48 cents
2009 53 cents
2010 55 cents
2011 55 cents
2012 56 cents
It is expected that the dividend for 2013 will be 58 cents
The current tax rate for the firm is 28%.
Apply the cost of ordinary capital to retained earnings
Calculate the Weighted Average Cost of Capital (WACC) for Easy FM. Show your working
Homework Answers
1.Calculation of Cost of 6% secured bonds:-
= Rate of interest (1- tax rate)
= 6(1-28%) = 4.32%
2. calculation of long term loans :-
= 9(1-28%) = 6.48%
3. cost of preference share-
= Preference dividend / market price per share *100
= .14 / 1.95*100
= 7.18%
4. cost of ordinary share :-
= Dividend per share / market price per share * 100
= .58 / 2.65*100
= 21.88%
Calculation of WACC:-
= Weight * Cost of respective source
= 4,00,000 / 45,00,000 * 4.32 +5,00,000/45,00,000*6.48 + 2,50,000/45,00,000*7.18 + 33,50,000/45,00,000*21.88
=0.38 + 7.2 + 0.40 + 16.29
= 24.27% WACC
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An extract from the Statement of
Financial Position as at 31 March 2012 for Easy
FM...
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