Burgundy plc is financed through bonds and ordinary shares. The bonds were issued five years ago at par value of £100 (total funds raised £5m). They carry an annual coupon of 10%, are due to be redeem
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Burgundy plc is financed through bonds and ordinary shares. The bonds were issued five years ago at par value of £100 (total funds raised £5m). They carry an annual coupon of 10%, are due to be redeemed in four years and are currently trading at £105.
The company’s shares have a market value of £4m, the return on risk-free government securities is 8% and the risk premium for an average-risk share has been 5%. Burgundy’s shares have a lower than average risk and its historic beta as measured by the co-movement of its shares and the market index correctly reflects the risk adjustment necessary to the average risk premium – this is 0.85. The corporate tax rate is 30%. Burgundy has a net asset figure of £3.5m showing on its balance sheet.
Required
Calculate the cost of equity capital
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