Weighted Average Cost of Capital

FM – May 2021 – L2 – Q3b – Cost of Capital

Calculate Gbewaa Ghana Ltd’s Weighted Average Cost of Capital

Question

b) Gbewaa Ghana Ltd has issued 10 million shares with a market value of GH¢5 per share. The equity beta of the company is 1.2. The current yield of short-term government debt is 14% per annum, and the equity risk premium is approximately 5% per annum. The debt finance of Gbewaa Ghana Ltd consists of bonds with a book value of GH¢10,000,000. These bonds pay interest at 18% per annum, and the par value and market value of each bond is GH¢100. The company’s tax rate is 25%.

Required:

Calculate Gbewaa Ghana Ltd’s Weighted Average Cost of Capital. (9 marks)

Answer

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Tags: Cost of Debt, Cost of Equity, WACC, Weighted Average Cost of Capital
Level: Level 2

Topic: Cost of capital
Series: MAY 2021

FM – Nov 2019 – L2 – Q1b – Cost of capital

Calculate the weighted average cost of capital using the dividend valuation model and capital asset pricing model.

Question

A colleague has been taken ill. Your managing director has asked you to take over from the colleague and to provide urgently-needed estimates of the discount rate to be used in appraising a large new capital investment. You have been given your colleague’s working notes, which you believe to be numerically accurate.

Working notes: Estimates for the next five years (annual averages) Stock market total return on equity 16% Own company dividend yield 7% Own company share price rise 14% Standard deviation of total stock market return on equity 10% Systematic risk of own company return on equity 14% Growth rate of own company earnings 12% Growth rate of own company dividends 11% Growth rate of own company sales 13% Treasury bill yield 12%

The company’s gearing level (by market values) is 1 : 2 debt to equity, and after-tax earnings available to ordinary shareholders in the most recent year were GH¢54,000,000, of which GH¢21,400,000 was distributed as ordinary dividends.

The company has 1 million issued ordinary shares which are currently trading on the Stock Exchange at GH¢3.21. Corporate debt may be assumed to be risk-free. The company pays tax at 30% and personal taxation may be ignored.

Required: Estimate the company’s weighted average cost of capital using:
i) The dividend valuation model.
ii) The capital asset pricing model.

State clearly any assumptions that you make. Under what circumstances these models would be expected to produce similar values for the weighted average cost of capital? (10 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Asset Pricing Model, Cost of Debt, Cost of Equity, Dividend Valuation Model, Weighted Average Cost of Capital
Level: Level 2

Topic: Cost of capital
Series: NOV 2019

FM – Nov 2017 – L2 – Q2a – Cost of capital

Calculate Zaytuna Ltd's Weighted Average Cost of Capital (WACC).

Question

One of your clients has seen many references to the “Cost of Capital” in the Business and Financial Times and has asked you to give him some guidance on what would be an appropriate figure for his organization-Zaytuna Ltd. The following information is available for Zaytuna Ltd.

Existing capital structure:

Issued ordinary shares-12,000,000 GH¢12,000
Retained earnings GH¢4,000
6% Preference shares GH¢2,000
9% Debenture repayable 2018 GH¢6,000
Total GH¢24,000

Details:

9% Debenture: Issued in 2008 at par, Current price GH¢92, A similar issue if made now would require to be at GH¢90.
Preference Shares: Preference shares have a par value of GH¢1 and were originally issued at 92p per share, Current price 43p, A similar issue if made now would require to be 40p per share.
Ordinary Share: The market price of an ordinary share is GH¢7.00, GH¢6 million in dividends were paid this year which represented 75% of earnings, Earnings are expected to grow at an annual rate of 5%, If new ordinary shares were issued now, costs incurred would represent 25p per share and a reduction below market value of 50p per share would also be made.
Corporate tax rate is 25%

Required:
Calculate Zaytuna Ltd’s Weighted Average cost of capital. (15 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cost of Debt, Cost of Equity, Weighted Average Cost of Capital
Level: Level 2

Topic: Cost of capital
Series: NOV 2017

FM – May 2021 – L2 – Q3b – Cost of Capital

Calculate Gbewaa Ghana Ltd’s Weighted Average Cost of Capital

Question

Required:

Calculate Gbewaa Ghana Ltd’s Weighted Average Cost of Capital. (9 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cost of Debt, Cost of Equity, WACC, Weighted Average Cost of Capital
Level: Level 2

Topic: Cost of capital
Series: MAY 2021

FM – Nov 2019 – L2 – Q1b – Cost of capital

Calculate the weighted average cost of capital using the dividend valuation model and capital asset pricing model.

Question

Required: Estimate the company’s weighted average cost of capital using:
i) The dividend valuation model.
ii) The capital asset pricing model.

State clearly any assumptions that you make. Under what circumstances these models would be expected to produce similar values for the weighted average cost of capital? (10 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital Asset Pricing Model, Cost of Debt, Cost of Equity, Dividend Valuation Model, Weighted Average Cost of Capital
Level: Level 2

Topic: Cost of capital
Series: NOV 2019

FM – Nov 2017 – L2 – Q2a – Cost of capital

Calculate Zaytuna Ltd's Weighted Average Cost of Capital (WACC).

Question

Existing capital structure:

Issued ordinary shares-12,000,000 GH¢12,000
Retained earnings GH¢4,000
6% Preference shares GH¢2,000
9% Debenture repayable 2018 GH¢6,000
Total GH¢24,000

Details:

9% Debenture: Issued in 2008 at par, Current price GH¢92, A similar issue if made now would require to be at GH¢90.
Preference Shares: Preference shares have a par value of GH¢1 and were originally issued at 92p per share, Current price 43p, A similar issue if made now would require to be 40p per share.
Ordinary Share: The market price of an ordinary share is GH¢7.00, GH¢6 million in dividends were paid this year which represented 75% of earnings, Earnings are expected to grow at an annual rate of 5%, If new ordinary shares were issued now, costs incurred would represent 25p per share and a reduction below market value of 50p per share would also be made.
Corporate tax rate is 25%

Required:
Calculate Zaytuna Ltd’s Weighted Average cost of capital. (15 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cost of Debt, Cost of Equity, Weighted Average Cost of Capital
Level: Level 2

Topic: Cost of capital
Series: NOV 2017

Question Tag: Weighted Average Cost of Capital

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FM – May 2021 – L2 – Q3b – Cost of Capital

Calculate Gbewaa Ghana Ltd’s Weighted Average Cost of Capital

FM – Nov 2019 – L2 – Q1b – Cost of capital

Calculate the weighted average cost of capital using the dividend valuation model and capital asset pricing model.

FM – Nov 2017 – L2 – Q2a – Cost of capital

Calculate Zaytuna Ltd's Weighted Average Cost of Capital (WACC).

FM – May 2021 – L2 – Q3b – Cost of Capital

Calculate Gbewaa Ghana Ltd’s Weighted Average Cost of Capital

FM – Nov 2019 – L2 – Q1b – Cost of capital

Calculate the weighted average cost of capital using the dividend valuation model and capital asset pricing model.

FM – Nov 2017 – L2 – Q2a – Cost of capital

Calculate Zaytuna Ltd's Weighted Average Cost of Capital (WACC).

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FM – May 2021 – L2 – Q3b – Cost of Capital

Calculate Gbewaa Ghana Ltd’s Weighted Average Cost of Capital

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Calculate the weighted average cost of capital using the dividend valuation model and capital asset pricing model.

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Calculate Zaytuna Ltd's Weighted Average Cost of Capital (WACC).

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Calculate Gbewaa Ghana Ltd’s Weighted Average Cost of Capital

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FM – Nov 2019 – L2 – Q1b – Cost of capital

Calculate the weighted average cost of capital using the dividend valuation model and capital asset pricing model.

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FM – Nov 2017 – L2 – Q2a – Cost of capital

Calculate Zaytuna Ltd's Weighted Average Cost of Capital (WACC).

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