FInance Topic 3

Question 1

Rights value per existing share formulae

Answer 1

Question 2

Comparing costs:

Answer 2

Question 3

Constant dividend model
Cost of equity

Answer 3

Intended to continue indefinitely

Question 4

Constant dividend growth model
Cost of equity

Answer 4

Question 5

Calculation of growth rate

Answer 5

Question 6

Calculation of sustainable growth rate

Answer 6

Question 7

Capital asset pricing model (CAPM)

Answer 7

Question 8

Cost of preference shares

Answer 8

Constant divided model usually appropriate
Assume preference shares = perpetual

Question 9

Cost of perpetual debt

Answer 9

Constant interest model = appropriate
Debt = may be irredeemable bond, or perpertual loan
Interest expense is and allowable deduction in calculating profit chargeable to tax, so net cost to business of interest is reduced

Question 10

Cost of redeemable debt

Answer 10

IRR calculation required

Question 11

XD & XI

Answer 11

Divided/interest is about to be paid - remove value from market price (cum dividend = with)

Dividend/interest has just been paid - market price doesn’t need adjusting (ex-dividend)

Question 12

WACC calculation

Answer 12