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WRE Energy Limited is a major oil and gas exploration company in Western Australia. It currently...

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Finance

WRE Energy Limited is a major oil and gas exploration company inWestern Australia. It currently has $300 million of market valuedebt outstanding, consisting of 9% coupon bonds with a maturity of15 years. The bonds pay semi-annual coupons. The face value of eachbond is $1,000 and are currently priced at $1,024.87 each. Thecompany also has an issue of 2 million preference sharesoutstanding with a market price of $20 each, paying an annualdividend of $1.20. WRE Energy also has 14 million ordinary sharesoutstanding with a price of $25.00 per share. The company isexpected to pay a $2.20 ordinary dividend 1 year from today, andthat dividend is expected to increase by 7% per year forever. Therelevant corporate tax rate is 30%.

a. Outline the necessary steps required to estimate thecompany’s weighted average cost of capital.

b. Calculate the after-tax cost of each of the company’s currentfinancing sources .

c. Using the information provided, calculate the market valuesfor the financing sources for WRE Energy .

d. Using the information from b.) and c.) calculate thecompany’s after-tax weighted average cost of capital .

(SHOW WORKINGS PLEASE)

Answer & Explanation Solved by verified expert
3.7 Ratings (295 Votes)
a STEPS TO ESTIMATE WEIGHTED AVERAGE COST OF CAPITAL STEP1 Bonds Calculated cost of Bond by determining Yield To MaturityYTM and taking into account tax shield on interest Calculate total Market Value of bond STEP2 PREFERENCE SHARES Calculated cost of Preference shares from dividend payments required Calculate total Market Value of Preference shares STEP3 ORDINARY SHARES Calculated cost of ordinary shares    See Answer
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WRE Energy Limited is a major oil and gas exploration company inWestern Australia. It currently has $300 million of market valuedebt outstanding, consisting of 9% coupon bonds with a maturity of15 years. The bonds pay semi-annual coupons. The face value of eachbond is $1,000 and are currently priced at $1,024.87 each. Thecompany also has an issue of 2 million preference sharesoutstanding with a market price of $20 each, paying an annualdividend of $1.20. WRE Energy also has 14 million ordinary sharesoutstanding with a price of $25.00 per share. The company isexpected to pay a $2.20 ordinary dividend 1 year from today, andthat dividend is expected to increase by 7% per year forever. Therelevant corporate tax rate is 30%.a. Outline the necessary steps required to estimate thecompany’s weighted average cost of capital.b. Calculate the after-tax cost of each of the company’s currentfinancing sources .c. Using the information provided, calculate the market valuesfor the financing sources for WRE Energy .d. Using the information from b.) and c.) calculate thecompany’s after-tax weighted average cost of capital .(SHOW WORKINGS PLEASE)

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