Company could redeem them – that is buy them back today at $93 Company could redeem them – that is buy them back today at $93.45 or make 5 interest payments of $14 each year plus redeem them at face value of $100 in five years time

We could have combined Ord Shares and Retained Earnings but if the question asked us to separate them then we should 2000,000 x Market value of shares 3.60 = $3,600,000 Balance Sheet Values

Past Exam Papers…

Testing the theory behind using WACC rates for investment criteria Example 1 Assets = Equity Shares only 100,000 Shareholders looking for 10% return and shares currently trading at $1 So dividend will be .10 per share or $10,000 in total Therfore our assets need to produce a NPAT of $10,000 Note income before tax = 10,000 / .7 = $ 14,285.72 Less Tax $ 4,285.71 Profit After tax $ 10,000.00 My theory is when working out the minimum requirement rate for our investments or capital expenditure we should get the WACC and divide by .7 , that is we need a return on Assets before tax of 10 / .7 = 14.2857%

Example 2 - same as example 1 except we have $50,000 shareholders and a $50,000 mortgage at 10% Assets = Equity + Liabilities 100,000 50,000 WACC calc is 50% of 10% + 50% of (10% x 0.7) = 8.5% So WACC says Assets only have to earn 8.5% return or $8500, but again I think it should be 8500 / .7 = Revenue before tax 12143 Assume interest was the only expense we had to cover before tax , therefore we need a profit after tax of $5000 for our shareholders then to have a profit after tax of $5000 we need to earn 5000 / .7 = 7143 before tax + profit required to cover shareholders dividend after tax - $5000 Proof So Revenue would be $5000 + 7143 = $ 12,143.00 Less Expenses - Interest $ 5,000.00 Profit before tax $ 7,143.00 Less Tax $ 2,142.90 Profit After tax