Question

How do I work out the WACC

The company’s preference shares are currently trading at $0.70 each. The company’s ordinary shares are currently trading at $1.55 each.

• The risk-free rate of return is 2.36 % p.a., and the return on the market is 8.50 % p.a.

• Debentures have a coupon interest rate of 9% p.a. and could be re-issued at the present time at an interest rate of 7% p.a. The debentures will be redeemed at their face value in three years’ time. Face value is as per the balance sheet.

• The mortgage loan is repayable in seven years’ time and the current interest rate is 4.85% p.a. The mortgage was initially negotiated at 8.15% p.a.

• Term loans have a current interest rate of 5% p.a., but were negotiated at an interest rate of 6% p.a. They are repayable in full in three years’ time. The term loans consists of regular semi-annually interest payments with the principal repaid at maturity

• Unsecured notes will mature in six months and will not be replaced. They have a current interest rate of 2.74% p.a.

• The current interest rate on the bank overdraft is 5.0% p.a.

• Interest on all debt securities is paid twice-yearly and the corporate tax-rate is 32 percent

Balance Sheet for Kidman Resources

Issued Capital $ million

308,000,000 Ordinary shares of $2.50 full paid 770.00 2,500,000 3.5% Preference Shares of $1.00 fully paid 2.50

Current Liabilities and Provisions

Bank Overdraft 3.00

Trade Creditors 5.00

Unsecured Notes 6.00

Non-Current Liabilities

Debentures 14.00

Term Loans 7.00

Mortgage 15.00

Answer 1

Cost of Equity =	Risk free rate + Beta * (Market return - Risk free return)
	=2.36+(1*(8.50-2.36)
	8.5
Assuming beta is to be 1 as beta is not provided
		A			B	A*B
Source	Amount	% of total Capital	Pre tax cost	Cost*(1-tax rate)	Post tax cost		Cost of Capital
Bank Overdraft	3.00	0.37%	5.00%	5.00%*(1-0.32) =	3.40%	0.37%*3.40% =	0.01%
Unsecured Notes	6.00	0.73%	1.37%	2.74%*(1-0.32) =	0.93%	0.73%*0.93% =	0.01%
Debentures	14.00	1.71%	7.00%	7.00%*(1-0.32) =	4.76%	1.71%*4.76% =	0.08%
Term Loans	7.00	0.86%	5.00%	5.00%*(1-0.32) =	3.40%	0.86%*3.40% =	0.03%
Mortgage	15.00	1.83%	4.85%	4.85%*(1-0.32) =	3.30%	1.83%*3.30% =	0.06%
Preference shares	2.50	0.31%	3.50%		3.50%	0.31%*3.50% =	0.01%
Ordinary shares	770.00	94.19%	8.50%		8.50%	94.19%*8.50% =	8.01%
Total Capital	817.50				WACC		8.21%