Problem:
A Company (BrainM plc) has 10 million ordinary shares of 50p each in issue out of an authorised ordinary share capital of 12 million. The company has recently paid a dividend of 12p per share on the ordinary shares, which are currently listed at 112p ex div. The dividend growth rate has recently been a little under 10% p.a., and this is expected to continue for the foreseeable future. Extracts from the group balance sheet are as follows:
BrainM plc
£000
Ordinary shares 5,000
Share premium 3,920
Reserves 7,490
Minority interests 1,790
3% irredeemable debentures 3,000
6% redeemable debentures 4,000
Bank loans 7,080
Interest on the debentures is payable annually, and both of the current year's payments are impending. The current market prices for £100 nominal value stock are £31.50 and £103.50 for the 2% and 6% debentures, respectively (both values being cum interest). The 6% debentures are redeemable in ten years' time at a premium of 2.5%. The bank loans currently bear interest at 2% p.a. above base rate (which is currently 3.5%) and are repayable in eight years. The effective corporation tax rate for BrainM plc is 35%.
How would I calculate the weighted average cost of capital to be used by the company in appraising the viability of the projects? Can you please explain, so i can understand how and why you come about it.