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Business valuations and market efficiency

Question 17

WACC

Bishop Co has previously calculated figures as follows:

Ke = 16.2%, market value of 1 ordinary share = $3.50

Kp = 5.1%, market value of one preference share = $1.75

Kd (irredeemable debt) = 4%, market value per $100 nominal value = $105

Kd (redeemable debt) = 5.7%, market value per $100 nominal value = $92.96

Kd (non tradable debt) = 4.9%, book value $2m.

In addition the following information is relevant:

Ordinary shares in issue 5 million

Preference shares in issue 1 million

Nominal value in issue of irredeemable loan notes = $2 million

Nominval value of redeemable loan notes in issue = $0.5 million.

Calculate the current WACC by market values.

WACC by market values:

Market value ordinary shares = 5m × $3.50 = $17.5m

Market value preference shares = 1m × $1.75 = $1.75m

Market value irredeemable debt = $2m/$100 × $105 = $2.1m

Market value redeemable debt = $0.5m/$100 × $92.96 = $0.4648m

Non-tradeable debt use book value = $2m

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