Answer to Question #213142 in Accounting for zanaya

Question

b) Uwezo Ltd intends to issue additional funds as follows: – 100,000 ordinary shares of shs 20 each

50,000 10% preference shares of shs 10 each

40,000 10% Debentures; @ shs 100 The market values are;

Ordinary shares shs 30, floatation fees of shs 2 per share Preference shares sh. 12, floatation fees of sh. 1 per share Debenture shs 90, and floatation fee shs 5 per debenture

 

Required:

Calculate weighted average cost of capital of Uwezo Ltd.

Answer 1

$WACC=(E/V)*Re+(D/V)*Rd(1-Tc)+(P/V)*Rp$

Ordinary share capital= $(30-2)*100000=2,800,000$

Preference share capital = $(12-1)*50000=550,000$

Value of Debenture =$(90-5)*40000 =3,400,000$

Total value of debt and equity= $2,800,000+550,000+3,400,000 = 6,750,000$

$WACC=2,800,000/6,750,000*10$$+550,000/6,750,000*10$$+3,400,000/6,750,000*10$

$WACC=4.15+0.82+5.04$

$WACC=10.01$%