Financial position statement at January 2017:Equity finance: Ordinary shares ($8)- $400,000

Question 1)Financial position statement at January 2017:Equity finance: Ordinary shares ($8)- $400,000


KFC Ltd is reviewing the capital structure of their company. The finance director wants a further analysis carried out in the belief that the company can minimize its weighted average cost of capital (WACC. An extract from KFC Ltd balance sheet is available for analysis:


Reserves- retained earnings- $300,000 $700,000

Non-current liabilities:

7% preference shares @$100 per share- $600,000

9% bonds (irredeemable) @ par vale $100- $300,000

6% bank loan (5 years)- $1,120,000 $3,020,000

TOTAL $3,720,000

You are also given the following information:

Yield on Treasury bills 5%

KFC Ltd equity beta 1.15

Current ex-div ordinary share price $30

Current ex-div preference share price $85

The return on equity of KFC Ltd 20%

Dividend last paid $1.25

Current ex-in the interest bond price $105

Required rate of return 12%

The retention policy of the company 30%

Corporate tax rate 30%


a) Calculate the following for KFC Ltd:

i) Cost of retained earnings

ii) Cost of the irredeemable bonds

iii) cost of equity

iv) Cost of preferred shares

b) Calculate the weighted Average cost of capital WACC.

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