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Dinla Co (Mar/Jun 16, amended)

Dinla Co has the following capital structure.

 

$'000

$'000

Equity and reserves

 

 

Ordinary shares

23,000

 

Reserves

247,000

 

 

 

270,000

Non-current liabilities

 

 

5% preference shares

5,000

 

6% loan notes

11,000

 

Bank loan

3,000

 

 

 

19,000

 

 

289,000

The ordinary shares of Dinla Co are currently trading at $4.26 per share on an ex dividend basis and have a nominal value of $0.25 per share. Ordinary dividends are expected to grow in the future by 4% per year and a dividend of $0.25 per share has just been paid.

The 5% preference shares have an ex dividend market value of $0.56 per share and a nominal value of $1.00 per share. These shares are irredeemable.

The 6% loan notes of Dinla Co are currently trading at $95.45 per loan note on an ex interest basis and will be redeemed at their nominal value of $100 per loan note in 5 years' time.

The bank loan has a fixed interest rate of 7% per year.

Dinla Co pays corporation tax at a rate of 25%.

Required

A. Calculate the after-tax weighted average cost of capital of Dinla Co on a market value basis.
B. Discuss the connection between the relative costs of sources of finance and the creditor hierarchy.
C. Discuss the circumstances under which the current weighted average cost of capital of a company could be used in investment appraisal and indicate briefly how its limitations as a discount rate could be overcome.
D. Explain the differences between Islamic finance and other conventional finance.

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