Riphean plc and Silurian plc are two businesses operating in different industries from one
another. They are both financed by a mixture of ordinary share and loan capital and both are
seeking to derive the cost of capital for investment decision making purposes. The following
information is available concerning the two businesses for the year to 30 November Year 8:
Riphean plc Silurian plc
Profit for the year £3.0m £4.0m
Gross dividends £1 .5m £2.0m
Market value per ordinary share £4.00 £1 .60
Number of ordinary shares 5m 1 0m
Gross interest yield on loan capital 8% 1 2%
Market value of loan capital £1 0m £1 6m
The annual growth rate in dividends is 5 per cent for Riphean plc and 8 per cent for Silurian plc.
Assume a 30 per cent tax rate.
(a) Calculate the weighted average cost of capital of Riphean plc and Silurian plc using the
(b) Discuss two possible reasons why the cost of ordinary share capital differs between the two
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