Calculating WACC for Kapusa plc - Corporate Finance Question

This corporate finance question teaches how to calculate the weighted average cost of capital (WACC) for Kapusa plc. It covers the costs of capital for equity, preference shares, and debentures, and provides a formula for calculating the cost of equity. The question also discusses the assumptions in the use of WACC in corporate strategy, including its market orientation and forward-looking nature.

Corporate finance
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Table of Contents
QUESTION 3 : CALCULATING WACC......................................................................................3
a) calculate the costs of capital for Kapusa plc...........................................................................3
b) the assumptions in the use of WACC in corporate strategy ..................................................4
REFERENCES................................................................................................................................5

QUESTION 3 : CALCULATING WACC
a) calculate the costs of capital for Kapusa plc
1. Cost of equity- It is expectation of equity shareholders. The value is performance divided
by expectation. Performance means the amount paid by the company to investors like
interest, dividend and redemption price. The following formula is used to calculate the
cost of equity:
=10(1+10%)+0.1 / 125
=18.8%
2. Cost of preference shares- The preference shareholders are paid dividends at a
specified rate on face value of preference shares.
(7+10%) / 100
= 0.077% or 0.08%
= 8%
3. Cost of debenture – The providers of the debt fund do not participate in the affairs
of the company but enjoys the charge on the profit before taxes.
Cost of debenture = Interest(1-tax rate) / nominal price
= 15(1-.33) / 100
= 0.1%
= 10%
4. Calculation of weighted average cost of capital
Particulars weights Cost of capital WACC
Equity 250000 / 1000000=.25 18.8 4.70%
Retained earnings 350000/1000000 = .35 18.8 6.58%

Preference shares 250000 / 1000000=.25 8 2.00%
Unsecured bonds 150000 / 1000000=.15 10.00% 1.50%
14.78%
The weighted average average cost of capital is 14.78%
b) the assumptions in the use of WACC in corporate strategy
1. It is market oriented.
2. To commit capital to the investment that is expected rate of return is from the market.
3. Its not the investor ,the function is investment.
4. It is ahead looking is based on expected returns.
5. The denominator against which the WACC is calculated as per the market value, not
book value.
6. Expected inflation is included to measure nominal terms.
7. It is the link, known as a discount rate, which equal to expected forthcoming returns for
the existence of the investment with the present value of the investment at a mentioned
date.

REFERENCES
Books and Journals
Chen, W.T., Zhou, G.S. and Zhu, X.K., 2019. CEO tenure and corporate social responsibility
performance. Journal of Business Research, 95, pp.292-302.
Cheng, H., Huang, D. and Luo, Y., 2020. Corporate disclosure quality and institutional investors'
holdings during market downturns .∗ Journal of Corporate Finance, 60, p.101523.
Hussain, M.J., Tian, G., Ayaz, M. and Ashraf, A., 2022. CEO Career Horizon and Corporate
Social Responsibility Assurance. Spanish Journal of Finance and Accounting/Revista
Española de Financiación y Contabilidad, pp.1-28.
Kong, D., Zhao, Y. and Liu, S., 2021. Trust and innovation: Evidence from CEOs' early-life
experience. Journal of Corporate Finance, 69, p.101984.