Calculate WACC for Excellent Ltd with New Bond Issues - Accounting Question

(a) (i) Cost of ordinary share = Dividend yield + Growth rate Dividend yield = Dividend per share / Market value per share = $0.2 / $4 = 5% Growth rate = 8% Cost of ordinary share = 5% + 8% = 13%

(ii) Cost of 7% preference share = Dividend / Market value Dividend = 7% x $20 = $1.4 Market value = $4,500,000 / 225,000 shares = $20 per share Cost of 7% preference share = $1.4 / $20 = 7%

(iii) Cost of 9% perpetual bond = Interest rate x (1 - Tax rate) Cost of 9% perpetual bond = 9% x (1 - 15%) = 7.65%

(iv) To calculate the cost of new 13% coupon bond, we need to use interpolation between the cost of existing bonds. At 12%, the market value of the bond is $2,272,727. At 14%, the market value of the bond is $1,818,182. Using interpolation formula: Cost of new 13% coupon bond = 12% + [(13% - 12%) / (14% - 12%)] x (1,818,182 - 2,272,727) = 12% + (1/2) x (-454,545) / 2,272,727 = 11.5%

(v) Cost of new zero-coupon bond = Discount rate Discount rate = (Par value - Market value) / Par value x 100% / Years to maturity Discount rate = ($1,000 - $360) / $1,000 x 100% / 3 = 21.33%

(b) Weight of ordinary shares = $16,000,000 / ($16,000,000 + $4,500,000 + $2,160,000 + $1,800,000 + $360,000) = 0.6897 Weight of 7% preference shares = $4,500,000 / ($16,000,000 + $4,500,000 + $2,160,000 + $1,800,000 + $360,000) = 0.2414 Weight of 9% perpetual bond = $2,160,000 / ($16,000,000 + $4,500,000 + $2,160,000 + $1,800,000 + $360,000) = 0.0931 Weight of new 13% coupon bond = $1,800,000 / ($16,000,000 + $4,500,000 + $2,160,000 + $1,800,000 + $360,000) = 0.0776 Weight of new zero-coupon bond = $360,000 / ($16,000,000 + $4,500,000 + $2,160,000 + $1,800,000 + $360,000) = 0.0152

WACC = Weighted average cost of capital WACC = (0.6897 x 13%) + (0.2414 x 7%) + (0.0931 x 7.65%) + (0.0776 x 11.5%) + (0.0152 x 21.33%) = 9.86%

Therefore, the WACC of Excellent Ltd after issuing the two new bonds is 9.86%.