Question 1 (August 2017) a) Yennox Bhd. wishes to calculate its weighted average

Question

Question 1 (August 2017) a) Yennox Bhd. wishes to calculate its weighted average cost of capital (WACC) based on the following information 50 million RM30 milion RM20 million RM15 lion RM2.00 per share RM105 per RM100 bond Number of ordinary shares Book value of 5% convertible bond Book value of 9% long-term loan Market value of overdraft Market price of ordinary shares Market value of convertible bond Yennox expects the share price to rise in the future at a rate of 5% per annum. The convertible bonds can be redeemed in 5 years' time at a 1 value or converted in 6 years' time into 40 shares of Yennox per RM100 bond. The cost of debt is 8%. 0% premium to their nominal Yennox has geared equity beta of 1.4. The risk-free rate is 4% and the market return is 10%. The annual corporate tax rate is 30%. Analyse the weighted average cost of capital (WACC) of Yennox. State clearly the assumptions you make (13 marks)

Explanation / Answer

WACC= E/V*Re+D/V*Rd(1-tax)

E=Market value of equity=50millions*RM2.00 per shares= RM100milliion

D= Market value of debt= RM30+RM20+RM15 in millions= RM65Millions

V= value of the capital (E+V)= RM100+RM65 in millions= RM 165Millions

Re= cost of equity

Rd= cost of Debt

T= Tax rate

Cost of equity calculation (CAPM Model)

Re= Rf+ (Rm-Rf)*B

Rf= risk free rate =4%

Rm= Market annual rateof return=10%

B= equity beta=1.4

Re= 4%+ (10%-4%)*1.4 =12.4%

Rd=8%

Tax rate=30%

WACC= 12.4*100/165+8*65/165*(1-.30) =9.721%

Hence WACC=9.721%, also it seems the company has higher component of equity in capital structure as compared to debt. lesser component of debt shows that that company not enjoying tax shield benefits as it could and also ownership of the firm is more diluted (less control of management).

Note: wacc calculations is based on present scenerio and market value of capital

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.