1. You are required to calculate the Weighted Average Cost of Capital (WACC) of Sethoo & Sons Limited from the data below: Black LimitedStar LimitedNumber of Ordinary Shares(GHC 1.00)2,000,0001,000,000Net Income available toOrdinary Shares600,000250,000Gross Dividend500,000200,000Market Price per share3.002.00Market value of Debts3,000,0001,500,000Annual Growth rate ofDividend12%10%Gross Interest yield10%11% NOTE: The corporation tax rate is 50%. Debts are currently quoted at GHC 100 per block. 2. Explain why the Market Value Approach of calculating WACC is preferred to the Book Value Approach.3. What are the uses of Weighted Average Cost of Capital?

Proportion of ordinary shares and debt for each companies is calculated as below: Excel Working:…

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Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter7: Financial Activities

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1. You are required to calculate the Weighted Average Cost of Capital (WACC) of Sethoo & Sons Limited from the data below:

	Black Limited	Star Limited
Number of Ordinary Shares (GHC 1.00)	2,000,000	1,000,000
Net Income available to Ordinary Shares	600,000	250,000
Gross Dividend	500,000	200,000
Market Price per share	3.00	2.00
Market value of Debts	3,000,000	1,500,000
Annual Growth rate of Dividend	12%	10%
Gross Interest yield	10%	11%

NOTE: The corporation tax rate is 50%. Debts are currently quoted at GHC 100 per block.

2. Explain why the Market Value Approach of calculating WACC is preferred to the Book Value Approach.

3. What are the uses of Weighted Average Cost of Capital?

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