Reference no: EM13199683

The company has been investigating a number of projects but has been unable to accurately calculate an appropriate benchmark rate for measuring these projects. You have been supplied with the following information and asked to calculate the weighted average cost of capital (WACC) for the company.

Geotech Consulting

Statement of Financial Position (extract from 30 June 2010 accounts)

Common Stock par value $2.00                                                         4,000,000

14% Preference Shares par value $3.00                                              3,000,000

12% Bonds semi-annual (face value $100)                                           2,000,000

Term Loan                                                                                     350,000

Mortgage                                                                                      700,000

Additional Information:

• The ordinary shares are currently trading at $2.86 while the Preference shares are trading at $3.15.
• Return on government bonds is 4%, the market risk premium 6% and the growth rate in dividends has been consistently 3% over the past five years. A consultant has estimated the company to have a beta of 1.3.
• Corporate tax rate is 35%
• The bonds originally had a 6 year term to maturity and were issued exactly two years ago.
• The before tax return on similar risk bonds is 9%
• Interest on the term loan is 10% and the Mortgage 9%.

Required;

Calculate the weighted average cost of capital for CTRL using the market valuation approach.