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%
