What is the businesss after-tax weighted average cost of

Question

Question 1:

Relevant information from the balance sheet of Nikos plc, as at today's date, is as follows:

	£m
Ordinary shares of £0.25 each	33
11 % redeemable preference shares of £1 each	8
Share premium account	6
Revaluation reserve	5
Retained profits	12
9% debenture stock	15

The business's finance staff has estimated the costs of the individual elements of finance (after tax) as follows:

Ordinary shares                                                15

Preference shares                                            10

Debenture stock                                                6

Today's Stock Exchange quoted prices of the securities are as follows:

Ordinary shares Preference shares Debenture stock

0.61 1.20 98.00 (per £100 nominal)

Required:

What is the business's after-tax weighted average cost of capital? (Show all workings)

Question 2:

Chamberton plc is a Stock Exchange listed business, which wishes to raise £100 million to invest in a new project that is expected to generate operating profit of about £20 million each year. Three possible sources have been suggested:

i) a rights issue of ordinary shares at £2.50 per share;

ii) an issue of 10 % preference shares at par;

iii) an issue of 8% loan stock.

The most recent annual accounts of the business' can be sumrnarised as follows:

Profit and loss account

	£m
Turnover	450
Operating profit	110
Interest	20
Profit before tax	90
Tax
	60
Dividend	30
Retained profit	30
Balance sheet
	£m
Fixed assets	240
Current assets	280
Current liabilities              (including £60m overdraft)	180
	100
	340
12% debentures 2008	120
	220
Ordinary shares of £0.50 each	50
Share premium	50
Revenue reserves	120
	220
The shares are currently quoted at £3.50 each.
Required

(a) Outline the important features of each of the three proposed types of financing from the point of view of the existing shareholders.

(b) To the extent that you have the information, assess the suitability of the three proposed types of finance, in the business's circumstances. You should make clear what other information you would find useful in completing this assessment, and why you would find it useful.