Geotech Consulting is a privately owned geological consultancy and research facility based in Hamilton. The company has been investigating a number of projects but has been unable to accurately calculate an appropriate benchmark rate for measuring these projects. You have been supplied with the following information and asked to calculate the weighted average cost of capital (WACC) for the company.
Geotech Consulting
Statement of Financial Position (extract from 30 June 2014 accounts)
Common Stock par value $2.00 4,000,000
14% Preference Shares par value $3.00 3,000,000
12% Bonds semi-annual (face value $100) 2,000,000
Term Loan 350,000
Mortgage loan 700,000
Additional Information:
The ordinary shares are currently trading at $2.86 while the Preference shares are trading at $3.15.
Return on government bonds is 4%, the market risk premium 6%. A consultant has estimated the company to have a beta of 1.3.
Corporate tax rate is 35%
The bonds originally had a 6 year term to maturity and were issued exactly two years ago and would be redeemed at par.
The before tax return on similar risk bonds is 9%
Interest on the term loan is 10% and the Mortgage is 9%.
Required;
Calculate the post-tax weighted average cost of capital for Geotech Consulting using the market valuation approach (show your workings).