G is a public limited company and manufactures washing machines. Breakdown
of the company's long term funding together with current market values is below ;
£1 ordinary shares- total nominal value = 32 million and current market value = £2.73 per share (cum dividend)
£0.50 7% Irredeemable preference shares - total nominal value = 11 million and current market value = 0.56 per shares ( ex div)
8% irredeemable debentures =total nominal value = 13 million and current market value = 103 (cum interest )
G's most recent ordinary dividend is due to be paid very soon and totals £7.04 million. The debentures are redeemable at par in four years time. Company's dividend have increased in a regular fashion over the past 5 years and the 2017 dividend is 27.6% higher than the dividend in 2012. Corporate tax rate stands at 30%.
G board of directors is currently in discussions with one of his ex-managers who no works in South Africa. The current owners wish to retire and G would have to pay 12.5 million to acquire South Africa using the net present value approach. However the majority of the 12.5 million would need to be funded by additional borrowing which are likely to have an interest cost of at least 11% per annum. The board is unsure about the cost of capital which should be used for the net present value calculation.
What is the current WACC?
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