Abyss Gaming has the following capital structure, which is considered ideal, tak
ID: 2807467 • Letter: A
Question
Abyss Gaming has the following capital structure, which is considered ideal, taken from the annual report as at December 31, 2017:
*there are 7 million common shares outstanding at a market price of $30 per share. The corporate income tax rate is 30%. The dividends on common shares are expected to grow to 5% per year.
Required:
(a) Determine the cost of capital as at December 31, 2017 for each of the following components: i. Debt ii. Preferred shares iii. Common shares
(b) Calculate the weighted average cost of capital for Richelieu Investments Limited
Balance Sheet Market ValuePrice/Unit Dividend/Share n/a $2.50 1.5 n/a $100,000,000 $90,000,000$90.00 20,000,000 $15,000,000 30.00 30.00 n/a 10% Bonds Preferred shares Common shares Retained earnings "corporate income taxe rate 30% "dividends expected to grow 5% i. Debt ii. Prefferd Shares iii) Common Shares WACC 200,000,000 50,000,000Explanation / Answer
after tax cost of debt
before tax cost of debt*(1-tax rate)
10*(1-.4)
6
cost of preferred stock
preferred dividend/market price of preferred stock
2.5/30
8.333
cost of common stock
(expected dividend / market price)+growth rate
(1.605/30)+5%
10.35
expected dividend
1.5*1.07
1.605
weighted average cost of capital
book value weights
source
value
weight
cost
cost*weight
debt
10000000
0.27027
6
1.621622
preferred stock
2000000
0.054054
8.333
0.450432
common stock
20000000
0.540541
10.35
5.594595
retained earnigs
5000000
0.135135
10.35
1.398649
37000000
WACC
9.065297
weighted average cost of capital
market value weights
source
value
weight
cost
cost*weight
debt
9000000
0.246575
8.333
2.054712
preferred stock
1500000
0.041096
10.35
0.425342
common stock
21000000
0.575342
10.35
5.954795
retained earnigs
5000000
0.136986
10.35
1.417808
36500000
WACC
9.852658
after tax cost of debt
before tax cost of debt*(1-tax rate)
10*(1-.4)
6
cost of preferred stock
preferred dividend/market price of preferred stock
2.5/30
8.333
cost of common stock
(expected dividend / market price)+growth rate
(1.605/30)+5%
10.35
expected dividend
1.5*1.07
1.605
weighted average cost of capital
book value weights
source
value
weight
cost
cost*weight
debt
10000000
0.27027
6
1.621622
preferred stock
2000000
0.054054
8.333
0.450432
common stock
20000000
0.540541
10.35
5.594595
retained earnigs
5000000
0.135135
10.35
1.398649
37000000
WACC
9.065297
weighted average cost of capital
market value weights
source
value
weight
cost
cost*weight
debt
9000000
0.246575
8.333
2.054712
preferred stock
1500000
0.041096
10.35
0.425342
common stock
21000000
0.575342
10.35
5.954795
retained earnigs
5000000
0.136986
10.35
1.417808
36500000
WACC
9.852658