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Weighted Average Cost of Capital


Question 3 Radar plc wishes to calculate its weighted average cost of capital and the following information relates to the company at the current time Number of ordinary shares £10 million Book value of 7% convertible debt £14 million Book value of 8% bank loan £1.72 million Market price of ordinary shares £5.20 per share Market value of convertible debt £102 per £100 bond Equity beta of radar plc 1.2 Risk-free rate return 5% Equity risk premium 7% Rate of taxation 30% Radar plc expects share price to in the future at an average rate of 5% per year. The convertible debt can be redeemed at par in eight years’ time, or converted in six years’ time into 16 shares of Radar plc per £100 bond Question: 1. Calculate the market value weighted average cost of capital of radar plc. State clearly any assumptions that you make. (12.5 marks)