Weighted Average Cost of Capital Analysis of Bendigo Bank

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Bendigo Bank Analysis WACC Analysis (Question 2) The decision to choose the issuance of preferred shares or unsecured notes is balanced not only by the cost of the capital to the bank, but also the characteristics of the instruments themselves. Issuing preferred stock may be advantageous to the current firm's management due to its unique characteristics over ordinary stock, as well as its hybrid status as a financing instrument. Preferred stock is enticing to investors since it is senior to ordinary stock and delivers a set dividend payment, yet generally warrants the holder no voting rights. A firm that repurchases voting shares of ordinary stock, while at the same time issuing preferred shares, effectively retains a similar balance of outstanding shares, while diminishing the voting pool. The bank's beta of .88 and the expected return of 12.72% from the All Ordinaries Accumulation Index (Pg. 3) produce a required rate of return of 11.9784%. This rate reflects a discount to the expected rate of return to the overall market, due to a lower risk and return profile the beta coefficient suggests of the bank. Based upon a weighted average cost of capital, the issuance of preferred shares yields an overall, after tax, price of 3.587%. The underlying assumption is that the common shares continue to receive an annual dividend of .23, yield of 4.15%. The alternate consideration of issuing unsecured bonds costs the bank 3.721% for the capital. The calculation is based

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