Nile Inc
Nile Inc is considering an investment of capital to be raised from the issue of new ordinary shares and debentures in a mix which will hold its gearing ratio approximately constant. It wishes to estimate its weighted average cost of capital.
The company has an issued share capital of 1 million ordinary shares of $1 each; it has also issued $800,000 of 8% debentures. The market price of ordinary shares is $4.76 per share and debentures are priced at $77 per cent. Dividends and interest are payable annually. An ordinary dividend has just been paid; the next instalment of interest is payable in the near future. Debentures are redeemable at par in 15 years' time.
A summary of the most recent statement of financial position runs as follows:
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$'000
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$'000
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$'000
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Ordinary share capital
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1,000
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Non-current assets
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1,276
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Reserves
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1,553
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Current assets
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4,166
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|
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Deferred taxation
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164
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Less: current
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|
|
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Debentures
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800
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liabilities
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1,925
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2,241
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3,517
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3,517
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Dividends and earnings have been as follows:
Dividends (excluding tax credit) Earnings before tax Earnings after tax $'000 $'000 $'000
20X4 200 575 350
20X5 230 723 452
20X6 230 682 410
20X7 260 853 536
20X8 300 906 606
Assume that there have been no changes in the system or rates of taxation during the last five years, that the rate of corporation tax is 35% and that the standard rate of income tax is 30%. Assume that 'now' is 20X8.
Required
(a) Calculate Nile plc's weighted average cost of capital
(b) Discuss briefly any difficulties and uncertainties in your estimation