Tinep Co is planning to raise funds for an expansion of existing business activities and i

n preparation for this the company has decided to calculate its weighted average cost of capital. Tinep Co has the following capital structure:

The ordinary shares of Tinep Co have a nominal value of 50 cents per share and are currently trading on the stock market on an ex dividend basis at $5·85 per share. Tinep Co has an equity beta of 1·15.

The loan notes have a nominal value of $100 and are currently trading on the stock market on an ex interest basis at $103·50 per loan note. The interest on the loan notes is 6% per year before tax and they will be redeemed in six years’ time at a 6% premium to their nominal value.

The risk-free rate of return is 4% per year and the equity risk premium is 6% per year. Tinep Co pays corporation tax at an annual rate of 25% per year.

Required:

(a) Calculate the market value weighted average cost of capital and the book value weighted average cost of capital of Tinep Co, and comment briefly on any difference between the two values. (9 marks)

(b) Discuss the factors to be considered by Tinep Co in choosing to raise funds via a rights issue. (6 marks)