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Dinla Co has the following capital structure.
| Equity and reserves | ||
| Ordinary shares | 23,000 | |
| Reserves | 247,000 | |
| ––––– | ||
| 270,000 | ||
| Non-current liabilities | ||
| 5% Preference shares | 5,000 | |
| 6% Loan notes | 11,000 | |
| Bank loan | 3,000 | |
| ––––– | ||
| 19,000 | ||
| ––––– | ||
| 289,000 | ||
| ––––– |
The ordinary shares of Dinla Co are currently trading at $4·26 per share on an ex dividend basis and have a nominal value of $0·25 per share. Ordinary dividends are expected to grow in the future by 4% per year and a dividend of $0·25 per share has just been paid.
The 5% preference shares have an ex dividend market value of $0·56 per share and a nominal value of $1·00 per share. These shares are irredeemable.
The 6% loan notes of Dinla Co are currently trading at $95·45 per loan note on an ex interest basis and will be redeemed at their nominal value of $100 per loan note in five years’ time.
The bank loan has a fixed interest rate of 7% per year.
Dinla Co pays corporation tax at a rate of 25%.
Requirements:
Calculate the after-tax weighted average cost of capital of Dinla Co on a market value basis.
Discuss the circumstances under which the current weighted average cost of capital of a company could be used in investment appraisal and indicate briefly how its limitations as a discount rate could be overcome.
Discuss the connection between the relative costs of sources of finance and the creditor hierarchy.
Answers submitted
| Created by | Ref | Marking | Action |
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a 10024 |
8 | |
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b 10026 |
5 | |
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c 10028 |
3 | |
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d 10030 |
4 | |
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a 9608 |
8 | |
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d 9588 |
4 | |
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a 9028 |
8 | |
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a 8200 |
8 | |
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a 8306 |
8 | |
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b 8214 |
5 | |
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c 6024 |
3 | |
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a 8206 |
8 | |
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b 8208 |
5 | |
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a 8202 |
8 | |
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b 8210 |
5 | |
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a 6984 |
8 | |
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b 6986 |
5 |
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