Assignment Problem: The statement of financial position of Royalest Ltd, a stock-exchange listed company is provided below.
Statement of Financial Position as at 31 December 2016
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Rs million
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Rs million
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Assets
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Non-Current Assets
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Land and Buildings
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425
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Furniture and Fittings
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178.5
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Plant and Equipment
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220.4
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823.9
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Current Assets
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Inventory
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29.8
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Trade Receivables
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45.75
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Prepayments
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3.75
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79.3
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Total Assets
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903.2
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Equity and Liabilities
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Equity
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Ordinary Share Capital
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415
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Retained Earnings
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95.75
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510.75
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11% Preference Share Capital
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90
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600.75
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Non-Current Liabilities
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Long Term Borrowings
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170
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Current Liabilities
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Trade Payables
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51.2
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Accruals
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10.75
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Bank Overdraft
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70.5
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Total Liabilities
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302.45
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Total Equity and Liabilities
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903.2
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An ordinary share of Royalest Ltd, which was issued at Rs2.00 per share, is currently traded at Rs2.75 per share. Ordinary dividend paid by the company amounted to Rs62.25 million for the year ended 31 December 2016 and the dividends of the company have been growing by an average rate of 4% per year in recent years. The risk free rate and the average return on the market is 5% per year and 9% per year respectively.
The long term borrowings of the firm consist of debentures which are redeemable in 7 years' time. The debenture pays annual interest of 8% and has a par value of Rs1,000 per debenture. The current market value of one debenture is Rs925.
Preference shares of Royalest Ltd were issued at Rs1.50 per share and one preference share is currently traded at Rs1.80.
Interest on bank overdraft is calculated every month and the nominal interest on bank overdraft is 8.4% per annum.
Royalest Ltd pays tax on profit at the rate of 20% per annum.
Required: Using market values where appropriate, calculate the weighted average after tax cost of capital of Royalest Ltd.
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