Weigted Average Cost of Capital
Good Morning all,
The directors of Silverstone Ltd are considering opening a factory to
manufacture a new product. Detailed forecasts of the product's
expected cash flow have been made. It is estimated that an initial
capital investment of 5.2mil is required.
The company's current authorised share capital consists of 6mil ordinary
shares,each with a nominal value of 50cents.During the last 5years
the number of shares in issue has remained constant at 3mil,and the
market price per share is 135 cents.The dividend paid in December2009
was 16cents per share,with a constant growth of 7% per annum.
The company has 1mil 12%,25cents preference shares in issue,with a
market price of 75cents per share. It also has 800000 8% debentures,
redeemable in four years' time with a current yield to maturity of 11%.
The company also has outstanding, a 500000 bank loan repayable in
eight years' time.The rate of interest on this loan is fixed at 14%.
The company pays tax at the rate of 30%.
a)What is the weighted average cost of capital.
b) I must explain to the directors what assumptions they are making if
the WACC in (a) is used to discount the expected cash flows of the
project.
Many thanks
