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The finance director of AQR Co has heard that the market value of the company will increase if the weighted average cost of capital of the company is decreased. The company, which is listed on a stock exchange, has 100 million shares in issue and the current ex div ordinary share price is $2.50 per share. AQR Co also has in issue bonds with a book value of $60 million and their current ex interest market price is $104 per $100 bond. The current after-tax cost of debt of AQR Co is 7% and the tax rate is 30%.

The recent dividends per share of the company are as follows.

Year    20X0    20X1    20X2    20X3    20X4
Dividend per share (cents) 19.38 20.2 20.41 21.02 21.8

 

The finance director proposes to decrease the weighted average cost of capital of AQR Co, and hence increase its market value, by issuing $40 million of bonds at their nominal value of $100 per bond. These bonds would pay annual interest of 8% before tax and would be redeemed at a 5% premium to nominal value after 10 years.

Requirements:

a

Calculate the market value after-tax weighted average cost of capital of AQR Co in the following circumstances:

(i) before the new issue of bonds takes place;
(ii)  after the new issue of bonds takes place.
(iii) Comment on your findings.

Marks: 12
b

Discuss the director’s view that issuing traded bonds will decrease the weighted average cost of capital of  AQR Co and thereby increase the market value of the company.

Marks: 8

Answers submitted

Created by Ref Marking Action
Rakhi Gupta's picture
Rakhi Gupta
11/10/2020 - 13:13
a
10098
12
Rakhi Gupta's picture
Rakhi Gupta
11/10/2020 - 13:34
b
10100
8
Rakhi Gupta's picture
Rakhi Gupta
11/02/2020 - 20:08
a
9992
12
Rakhi Gupta's picture
Rakhi Gupta
11/02/2020 - 20:31
b
9994
8
Abhro Gourab Das's picture
Abhro Gourab Das
09/05/2020 - 13:59
a
9620
12
Nafeez Imtiaz Hossain's picture
Nafeez Imtiaz H...
04/27/2020 - 20:39
a
9140
12
Nafeez Imtiaz Hossain's picture
Nafeez Imtiaz H...
04/26/2020 - 20:31
a
9134
12
Nafeez Imtiaz Hossain's picture
Nafeez Imtiaz H...
04/26/2020 - 20:45
b
9136
8
Apurba nandy's picture
Apurba nandy
03/04/2020 - 15:52
a
9042
12
Apurba nandy's picture
Apurba nandy
03/04/2020 - 15:33
a
5682
12
Abhro Gourab Das's picture
Abhro Gourab Das
03/03/2020 - 16:40
a
9004
12
Apurba nandy's picture
Apurba nandy
12/02/2019 - 04:09
a
8324
12
Apurba nandy's picture
Apurba nandy
12/02/2019 - 04:10
b
8326
8
Tanzeer UL Alaam's picture
Tanzeer UL Alaam
11/27/2019 - 11:32
a
7982
12
Arys Da Glosen's picture
Arys Da Glosen
11/25/2019 - 12:19
a
8172
12
Masum Billah's picture
Masum Billah
11/13/2019 - 20:29
a
7976
12
Tanbirul Kabir Tanbir's picture
Tanbirul Kabir ...
11/13/2019 - 20:30
a
7979
12