Question 4a
| Equity and reserves | $000 | $000 |
|---|---|---|
| Ordinary shares | 23,000 | |
| Reserves | 247,000 | 270,000 |
| Non-current liabilities | ||
| 5% Preference shares | 5,000 | |
| 6% Loan notes | 11,000 | |
| Bank loan | 3,000 | |
| 19,000 | ||
289,000 |
The ordinary shares of Dinla Co are currently trading at $4·26 per share on an ex dividend basis and have a nominal value of $0·25 per share. Ordinary dividends are expected to grow in the future by 4% per year and a dividend of $0·25 per share has just been paid.
The 5% preference shares have an ex dividend market value of $0·56 per share and a nominal value of $1·00 per share. These shares are irredeemable.
The 6% loan notes of Dinla Co are currently trading at $95·45 per loan note on an ex interest basis and will be redeemed at their nominal value of $100 per loan note in five years’ time.
The bank loan has a fixed interest rate of 7% per year.
Dinla Co pays corporation tax at a rate of 25%.
Required:
(a) Calculate the after-tax weighted average cost of capital of Dinla Co on a market value basis. (8 marks)