Pink Cow Attempt

Weighted average cost of capital

Component Market value Weight Cost WACC

Ordinary Shares 5,000,000 60% 22.00% 13%

Preference Shares 700,000 8% 13.71% 1%

Debentures 1200 000 14% 10.64% 2%

Long Term Loan 1 000 000 12% 9.57% 1%

Bank Overdraft 500 000 6% 15.20% 1%

WACC 18%

Calculations

Calc 1
Market Value of Equity =200 000 shares @ $25.00 = $5 000 000

Calc 2 Cost of Equity

P0 = D1 / (r-g)
25 = (3.92 x 1.05) / (r – 0.05)
r = 22%

Calc 3
Market Value of Preference Shares =10 000 shares @ $70.00 each = $700 000

Calc 4 –
Cost of Preference Shares
PV $70
PMT $10 ($50 x 20%)
FV -$60 ($50 x 1.2)
N 8
Therefore i = 13.17%

Calc 5

Market value:
I/Yr 9.80 (14.00 x 0.76)
N 10
PMT 1.05 (150) ($10 x 15% = $1.50 x 0.7)
FV 14 ($10 x 1.4)
Compt PV (11.6)

Total market value = 100 000 x 12.00 (11.6) = $1 200 000 (1 160 000)
Calc 6
Cost of Debenture
=14% (given) x 0.76 = 10.64%

Calc 7 Long term loan

Market value:
$ 1 000 000 (given)

Cost:
PV -1 000 000
PMT 73 530.64
FV 0
N 30
I 12.60 0.76 = 9.57%

Calc 8 Bank overdraft

Market value:
=$500 000 (given)
 $500 000 of the bank overdraft is deemed to be a permanent source of finance and is
therefore included in WACC.

Cost:
= 20% (given) x 0.76 = 15.20%

Calc 9 Trade creditors

Not deemed to be a permanent source of finance and is therefore excluded from WACC