Dynamic World Vista Industries (DWVI) wishes to estimate its cost of capital for use in analyzing projects that are similar to those that already exist. The firm's current capital structure, in terns of market value, includes 30 percent corporate bond, 10% irredeemable loan notes, 10% preference shares and 50%ordinary shares. The firm's corporate bond has an average yield to maturity of 8.3%. DWVI also has an irredeemable loan notes currently trading at GHC40 ex interest, an interest rate of five (5) percent. Its preference shares have a GHC70 par value, an 8 percent dividend, and are currently selling for GHC76 per share. DWVI's beta is 1.05, return on riskless asset is 4% and the return on the GSE (the market proxy) is 11.4%. The industry is in 40% marginal tax bracket. Required: What are DWVI's pre-tax costs of debts, preference shares and ordinary shares? Calculate DWVI's weighted average cost of capital (WACC) on both a pre-tax and after-tax basis. Vhich WACC should DWVI uses when making investment decisions and why?
Dynamic World Vista Industries (DWVI) wishes to estimate its cost of capital for use in analyzing projects that are similar to those that already exist. The firm's current capital structure, in terns of market value, includes 30 percent corporate bond, 10% irredeemable loan notes, 10% preference shares and 50%ordinary shares. The firm's corporate bond has an average yield to maturity of 8.3%. DWVI also has an irredeemable loan notes currently trading at GHC40 ex interest, an interest rate of five (5) percent. Its preference shares have a GHC70 par value, an 8 percent dividend, and are currently selling for GHC76 per share. DWVI's beta is 1.05, return on riskless asset is 4% and the return on the GSE (the market proxy) is 11.4%. The industry is in 40% marginal tax bracket. Required: What are DWVI's pre-tax costs of debts, preference shares and ordinary shares? Calculate DWVI's weighted average cost of capital (WACC) on both a pre-tax and after-tax basis. Vhich WACC should DWVI uses when making investment decisions and why?
Chapter17: Multinational Capital Structure And Cost Of Capital
Section: Chapter Questions
Problem 14QA
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