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The statement of financial position of BKB Co provides the following information:

   $m  $m
Equity finance    
Ordinary shares ($1 nominal value)  25  
Reserves       15  40
     
Non-current liabilities    
7% Convertible bonds ($100 nominal value)  20  
5% Preference shares ($1 nominal value)      10  30
     
Current liabilities    
Trade payables  10  
Overdraft      15      25
     
Total liabilities        95

 

BKB Co has an equity beta of 1.2 and the ex-dividend market value of the company's equity is $125 million. The exinterest market value of the convertible bonds is $21 million and the ex-dividend market value of the preference shares is $6.25 million.

The convertible bonds of BKB Co have a conversion ratio of 19 ordinary shares per bond. The conversion date and redemption date are both on the same date in five years' time. The current ordinary share price of BKB Co is expected to increase by 4% per year for the foreseeable future.

The overdraft has a variable interest rate which is currently 6% per year and BKB Co expects this to increase in the near future. The overdraft has not changed in size over the last financial year, although one year ago the overdraft interest rate was 4% per year. The company's bank will not allow the overdraft to increase from its current level.

The equity risk premium is 5% per year and the risk-free rate of return is 4% per year. BKB Co pays profit tax at an annual rate of 30% per year.

Requirements:

a

Calculate the market value after-tax weighted average cost of capital of BKB Co, explaining clearly any  assumptions you make.

Marks: 12
b

Discuss why market value weighted average cost of capital is preferred to book value weighted average cost of capital when making investment decisions.

Marks: 4
c

Discuss the attractions to a company of convertible debt compared to a bank loan of a similar maturity as a source of finance.

Marks: 4

Answers submitted

Created by Ref Marking Action
Rakhi Gupta's picture
Rakhi Gupta
11/11/2020 - 12:24
a
10116
12
Rakhi Gupta's picture
Rakhi Gupta
11/11/2020 - 12:40
b
10118
4
Rakhi Gupta's picture
Rakhi Gupta
11/11/2020 - 13:21
c
10120
4
Rakhi Gupta's picture
Rakhi Gupta
11/02/2020 - 20:55
a
9998
12
Rakhi Gupta's picture
Rakhi Gupta
11/02/2020 - 20:59
b
10000
4
Apurba nandy's picture
Apurba nandy
03/04/2020 - 15:04
a
9040
12
Abhro Gourab Das's picture
Abhro Gourab Das
03/03/2020 - 18:31
a
9022
12
Subrata Banik's picture
Subrata Banik
03/03/2020 - 18:30
a
9024
12
Apurba nandy's picture
Apurba nandy
12/02/2019 - 03:02
a
5696
12
Apurba nandy's picture
Apurba nandy
12/02/2019 - 03:04
a
8320
12
Apurba nandy's picture
Apurba nandy
12/02/2019 - 03:23
b
5714
4
Apurba nandy's picture
Apurba nandy
12/02/2019 - 03:24
b
8322
4
hasarul basher pollob's picture
hasarul basher ...
09/29/2019 - 21:38
a
7470
12
hasarul basher pollob's picture
hasarul basher ...
09/29/2019 - 21:48
b
7482
4
hasarul basher pollob's picture
hasarul basher ...
09/29/2019 - 21:57
c
7490
4
Masum Billah's picture
Masum Billah
09/29/2019 - 21:38
a
7472
12
Masum Billah's picture
Masum Billah
09/29/2019 - 21:49
b
7484
4