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MINI-CASE-Q3.91T7.85

For calculating cost of capital for the company, the following figures have been gathered from the financial statements of QTS Ltd:

> Book Value of Current Assets $43.2 million and Current Liabilities $31.6 million

> Long-term Loan: $7.85 million > 9% Debentures: $30 million debentures issued at $1,000.

> Preference Share Capital: 8.0 million shares issued at $2 per share > General Reserves $8.60 million

> Retained Earnings: $25.70 million

> Ordinary Share Capital: 39 million shares issued at $1 per share The financial manager of the company has provided the following additional information:

> The loan requires a 7% interest payment, compounded monthly.

> A merchant banker suggests that QTS Ltd would have to offer a rate of 12.5% p.a. on any new issue of 22-year debentures.

> Government bonds are currently yielding 5.8% per annum. > Debenture coupons are paid semi-annually, with 22 years to maturity.

> 11% Preference shares of QTS Ltd are currently traded at $3.91 per share > The current market return on equity is estimated to be 13.2% per annum.

> QTS Ltd ordinary shares have recently traded at $3.57 and the company's financial manager believes that a beta of 2.2 is appropriate for the company.

> The company tax rate is 31%.

Requirement-A. Using relevant information, estimate the weighted average cost of capital for QTS Ltd. <4 marks>

Requirement-B. Using your own words (plagiarism issues would be checked), explain the use of WACC along with the CAPM for evaluating prospective projects. <2 marks>

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