Dinla Co provides calculations for WACC using market values for equity, preference shares, and debt instruments. It explains that using market values is preferred to book values as market values reflect current prices rather than past values. Convertible bonds offer lower interest rates than conventional debt as well as the option to convert to equity.
BKB Co similarly calculates WACC using market values for equity, convertible bonds, and preference shares. It provides workings to show how the cost of equity and convertible bonds are derived.
Card Co calculates the cost of equity using a dividend growth model based on historical dividend growth. It notes limitations of this approach and advantages of using CAPM which links return and risk.
Dinla Co provides calculations for WACC using market values for equity, preference shares, and debt instruments. It explains that using market values is preferred to book values as market values reflect current prices rather than past values. Convertible bonds offer lower interest rates than conventional debt as well as the option to convert to equity.
BKB Co similarly calculates WACC using market values for equity, convertible bonds, and preference shares. It provides workings to show how the cost of equity and convertible bonds are derived.
Card Co calculates the cost of equity using a dividend growth model based on historical dividend growth. It notes limitations of this approach and advantages of using CAPM which links return and risk.
Dinla Co provides calculations for WACC using market values for equity, preference shares, and debt instruments. It explains that using market values is preferred to book values as market values reflect current prices rather than past values. Convertible bonds offer lower interest rates than conventional debt as well as the option to convert to equity.
BKB Co similarly calculates WACC using market values for equity, convertible bonds, and preference shares. It provides workings to show how the cost of equity and convertible bonds are derived.
Card Co calculates the cost of equity using a dividend growth model based on historical dividend growth. It notes limitations of this approach and advantages of using CAPM which links return and risk.
Dinla Co provides calculations for WACC using market values for equity, preference shares, and debt instruments. It explains that using market values is preferred to book values as market values reflect current prices rather than past values. Convertible bonds offer lower interest rates than conventional debt as well as the option to convert to equity.
BKB Co similarly calculates WACC using market values for equity, convertible bonds, and preference shares. It provides workings to show how the cost of equity and convertible bonds are derived.
Card Co calculates the cost of equity using a dividend growth model based on historical dividend growth. It notes limitations of this approach and advantages of using CAPM which links return and risk.
; We assumes overdraft wont be included in the calculation as it is short term in nature.
Workings: W1: Cost of equity, r % Risk free (%) 4.00 Risk premium (%) 5.00 Beta 1.20 Cost of equity, r 10.00
W2: If redeem, $'000 Nominal 100.00 ; As it is not stated how the convertible loan notes is redeemed, we assume it will be redeemed at nominal value and it is cons
If Convert, $'000 Growth (%) 4 Share price 5.00 At the end of year 5 6.08 Conversion ratio 19.00 Conversion value 115.58
; So, the decision is to convert the bond at the end of year 5
W3: Cost of Preference Shares $'000 Io 0.05 Po 0.63 Cost of Pref.Shares , r 8.00
(b)
Why market value is preferred rather than book value cost of capital :
Market value is up to date
Market value is the value of the instruments now, not the past value like book value. Book value is likely to be lower than the a lower weighting which will understate the WACC as a whole. If WACC is understated, it will result in the return not as accura
(c)
(d) Attractions of covertible debts:
It can be converted to ordinary shares at maturity date
At the end of the maturity period, if the conversion value is higher than the redemption value, it can be converted to ordinary
Lower coupon rate
As it is able to be traded in the market, this means that it has a lower coupon rate compared to the similar conventional loan n
-Self liquidating. No need to redeem. It will turn into equity once converted -Enhance Gearing. Debt will turn into equity and therefore will further reduce the gearing. Then, later easier lah apply loan -More attractive than ordinary because of the conversion option. Act as 'sweetener' -Lower interest rate bcs of the conversion option, investors are still willing to invest eventhough lower rate offered emed at nominal value and it is constant in whichever year it is in.
PV 105.00 -4.71 -4.53 -4.36 -4.19 -99.04 -11.83 k value is likely to be lower than the market value. So, by using market value to calculate the cost of capital, it will prevent will result in the return not as accurate as expected or simply said it will understate the return also.
alue, it can be converted to ordinary shares and the debt holder could be the owner of the company and has voting rights.
ed to the similar conventional loan notes.
. Then, later easier lah apply loan
hough lower rate offered
tal, it will prevent
has voting rights.
Card Co
(a) Growth,g % Dividend Earliest 0.55 Dividend latest 0.62 Number of growths 3 Growth,g 4.07
Cost of equity, r $ Dividend Paid, Do 0.62 Growth, g (%) 4.07 D1 0.65 Market Value, Po 7.16 r (%) 13.14
(b) As for dividend growth model, it assumes that the dividends will always be paid at the year end and there is a growth account the growth of course is just an estimation which can be calculated using historic growth model (finding the average growth) or Then the dividends will be constantly grow every year. However, as the calculation is based on the historical data, it may be in
Capital asset pricing model or CAPM is another method to calculate the cost of equity. It uses beta which is the average chang premium which is the extra return needed to compensate for extra risk in the market. However, in this method, it assumes the non-controllable. So, the risk free rate will be plus with the risk premium rate according to beta proportioned to reflect the co directly while the dividend model assumes the inappropriate growth rate in the future years.
(c) V r Vr Calculation of WACC $'000 % $'000 Ordinary shares (a) 57,280.00 13% 7,526.59 8.5% Redeemable Bond (W1) 5,171.00 5.16% 266.82 62,451.00 7,793.42
WACC (%) 12.48
Workings: W1: Item Years Cashflow Market Value 0 103.42 Interest 1 -5.95 Interest 2 -5.95 Interest 3 -5.95 Interest 4 -5.95 Interest + Redemption value 5 -105.95
IRR (%) 5.16
here is a growth accounted. g the average growth) or using current reinvestment level. torical data, it may be invalid to assume it as future potential growth.
ich is the average change between the return of riskk free investment and market return to calculate the risk s method, it assumes the investment has been well diversified leaving only systematic risk or market risk which is rtioned to reflect the cost of equity. CAPM is preferred than dividend growth model as it links the return with the risk
