The following information has been taken from the Statements of Financial Position
and Financial Performance for Ergo Ltd for the year ended 31 December 2004.
$
Net profit after taxes 400,000
Retained earnings 1.1.2004 300,000
700,000
Less Dividends on ordinary shares 240,000
Dividends on preference shares 56,000
Page 2
Retained earnings 404,000
ASSETS
Inventory 240,000
Accounts receivable 164,000
Land and buildings 2,400,000
Plant and equipment 1,800,000
4,604,000
LIABILITIES
Accounts payable 300,000
Bank overdraft 500,000
12% debentures, $100 par value 1,000,000
1,800,000
SHAREHOLDERS FUNDS
14% preference shares $10 issue value 400,000
Ordinary shares $1 issue value 2,000,000
Retained earnings 404,000
2,804,000
Additional information
• The nominal rate of interest on the bank overdraft is 10 per cent per annum.
Interest is calculated monthly.
• The debentures are currently selling at $93.50 each and mature in four years
time.
• The preference shares are currently selling at $9.50 each.
• The ordinary shares are selling at $1.20 each. Dividends are expected to
grow at 5% indefinitely.
• The company income tax rate is 30 cents in the dollar.
Using the above information, calculate the weighted average cost of capital for Ergo
Ltd. Show all workings (use 2 decimal places).
$‘000 Weight% Rate%
Bank overdraft 500 .12 7.33 0.88
Debentures 935 .22 9.97 2.21
Pref Shares 380 .09 14.73 1.33
Ord. Shares 2400 .57 15.5 8.83
4215 100.00 13.25