Answer to Question #267554 in Accounting for Zee

Question

You have been appointed financial manager of AB Ltd which is listed on the

Johannesburg Stock Exchange. You need to establish the company’s current cost of

capital and you have been provided with the following information:

Ordinary share capital

There are 240 000 shares in issue at a nominal value of R2.00 each. A dividend of

R2.06 as recently been paid and this dividend amount is expected to continue in the

foreseeable future.

17% preference shares – R120 000

The preference shares dividends for the year end 31 December 2020 have been paid.

Similar preference shares are currently trading at 15% yield to maturity.

10% bonds– R1 280 000

The market interest rate for the same class of bonds as AB Ltd, is 12% per annum.

Additional information

AB Ltd’s beta is 1.57. The return on the market is 20%. The current return on Treasury

bills is 8% per annum. The company tax rate is 28% and the company is in a tax paying

position.

Required:

Calculate the WACC

Answer 1

WACC calculated by CAPM

$ERi=Rf+b1(Rm - Rf)$

$ERi=8+1.57(20-8)$

$ERi=8+1.57(12)$

$ERi=8+18.84$

$ERi=26.84$%

Therefore, WACC=28.84%