JB Communications Ltd is considering an expansion of its existing
operations. The following details of the company as at 30 June 1999 are provided for your information.
$10 million (book value) 90-day bank bills with a current interest rate of 6% p.a., maturing 30 September 1999.
$20 million (book value) 5-year bonds with an interest rate of 10% p.a. payable on 30 June and 31 December each following year. The face value of each bond is $200,000 and the bonds will mature on 30 June 2004. The required return is 9% p.a.
Ordinary shares to the market value of $20 million. The company income tax rate is 36 cents in the dollar, with franking levels of 80%. Return on the market portfolio is currently 13% p.a.,
the risk free rate is 7% p.a. and the company's beta is 0.8. The dividend yield is 5% in the market.
Calculate the WARR for the company.
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