Weighted Average Cost of Capital Analysis of Bendigo Bank

880 Words Jan 29th, 2018 3 Pages
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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