Answer:
The Kay Company
Weighted Average Cost of Capital:
a) using the book value weights = 13.1%
b) using the market value weights = 13.2%
c) Some of the factors that affect the Cost of Capital include market opportunities, capital provider's preference, market risk, inflation, reserve policy, budget surplus and deficit, trade activity, foreign trade surpluses and deficits, country risk, and finally, but not the least important, exchange rate risk.
Explanation:
a) Data and Calculations:
Capital structure as at 31st March, 2019:
Based on Based on % Costs
Book Value Market Value
Debentures 300,000 330,000 7
Preference 100,000 110,000 9
Equity 1,500,000 1,700,000 15
Debt 200,000 180,000 10
Total 2,100,000 2,320,000
b) The WACC (Weighted Average Cost of Capital) is the cost of capital based on the relative weights of each capital class.
c) WACC based on the Book Value weights:
= 1,500,000/2,100,000 * 15% + 300,000/2,100,000 * 7% + 100,000/2,100,000 * 9% + 200,000/2,100,000 * 10%
= 0.107 + 0.01 + 0.004 + 0.01
= 0.131
= 13.1%
d) WACC based on the Market Value weights:
= 1,700,000/2,320,000 * 15% + 330,000/2,320,000 * 7% + 110,000/2,320,000 * 9% + 180,000/2,320,000 * 10%
= 0.11 + 0.01 + 0.004 + 0.008
= 0.132
= 13.2%
