Wacc under every of the capital structures, Cost Accounting

Imperial Sandwich Plc is to be established shortly. The founders are considering their options with regard to capital structure. A total of £5 m will be required to establish the business and the two steps of raising these funds being considered here are:

 

a)      Selling 1 million shares at £5.00

b)      Selling 500,000 shares at £5.00 and borrowing £2.5 million with an interest rate of 10%.

 

The company strategy to pay out the total net income as dividends to the shareholders. The possible outcome for the future EBIT is £750,000. The corporate tax rate is 40%.

 

The founders has examined a proxy company and found it to have a beta of 1.2 and a market debt-equity ratio of 0.5. The risk-free rate is 5.8% and the market premium 4.5%

 

a)      Calculate the WACC under every of the capital structures. Comment on the result.

 

 

Posted Date: 3/23/2013 2:04:34 AM | Location : United States







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