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Calculation of weighted average cost of capital (WACC)
Market values
Market value of equity = 5m × 4.50 = $22.5 million
Market value of preference shares = 2.5m × .0762 = $1.905 million
Market value of 10% loan notes = 5m × (105/ 100) = $5.25 million
Total market value = 22.5m + 1.905m + 5.25m = $29.655 million
Cost of equity using dividend growth model = [(35 × 1.04)/ 450] + 0.04 = 12.08%
Cost of preference shares = 100 × 9/ 76.2 = 11.81%
Annual after-tax interest payment = 10 × 0.7 = $7
Using interpolation after-tax cost of loan notes = 5 + [(5 × 7.94)/ (7.94 + 20.96)] = 6.37%
WACC = [(12.08 × 22.5) + (11.81 × 1.905) + (6.37 × 5.25)]/ 29.655 = 11.05%
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