Always A Winner Ltd. is considering expanding its gambling network. The
Managing Director of the company, Mr GG, has offered you a good tip for the
races if you could provide information on the appropriate ‘discount rate’ for
calculating the viability of the proposed project. To help you with your
calculations, he has tabled the following extracts from the company’s latest
Financial Statements
Selected Financial data as at 31 December 2002:
SHAREHOLDERS FUNDS $
Ordinary shares Issue price $1.00 each, fully paid 20,000,000
10% Preference shares Issue price $2.00 each, fully paid 15,000,000
Retained Profit 14,500,000
LIABILITIES
Debentures 30,000,000
Bank Overdraft 7,000,000
Provision for Long Service Leave 10,000,000
Additional Information:
• 30,000 debentures have been issued with a coupon rate of 8%.
They mature in 4 years time. Similar debentures are currently
yielding 12%.
• The bank overdraft carries an interest rate of 12%. Interest is
charged quarterly.
• The current dividend paid is 12 cents per share. This dividend is
expected to grow indefinitely at 5% per annum.
• The expected market return on Always A Winner ordinary shares
is 11%.
• The risk free rate of interest is 6%.
• The current market price of the Preference Shares $1.50.
• The company tax rate is 30 %.
Required
Calculate the weighted average cost of capital (to 2 decimal places).
Show all workings.
Source Market
Value
Weight Cost % WACC %
(1) (2) (3) (4) (3)x(4)
Bank
Overdraft
7000000 0.080 8.78 0.70
Debentures 26355181 0.305 8.40 2.56
Ordinary
Shares
42000000 0.485 11.00 5.34
Preference
Shares 11250000 0.130 13.33 1.73
86605181 1.000 10.33
WACC =10.33%