Question 9.S-TQ3: Pollock has in issue 1 million ordinary shares, nominal valu...
Pollock has in issue 1 million ordinary shares, nominal value 25p and £100,000 of 8 per cent irredeemable bonds. The current ex dividend market price of the ordinary shares is 49p per share and the current ex-interest market price of the bonds is £82 per £100 nominal. The company has just paid a dividend of 6p per share and dividends are expected to continue at this level indefinitely. If the company pays corporation tax at a rate of 30 per cent, what is its weighted average cost of capital?
E = 1,000,000 × 0.49 = £490,000
D = 100,000 × 82/100 = £82,000
K_e = 6/49 = 0.1224 and so K_e is 12.24%
K_d = Interest/market value = 8/82 = 0.0976 and so K_d (before tax) is 9.76%
WACC = (( K_e × E) + ( K_d (1 – t) × D))/(E + D)
= ((12.24 × 490,000) + (9.76 × 0.7 × 85,000))/572,000
= 11.46%