2.10 marks

Delux Pty Ltd (ASX Listed Firm) provides mechanical services to the customers.Table below shows an extract of its balance sheet as at 30 June 2020:

Delux Balance Sheet as at 30 June 2020 (Extract)

Book Value $

Market Value $

Short Term Notes (16% interest)

500,0000

600,000

Long Term Notes (12% interest)

1,000,000

1,400,000

Share Capital

1,500,000

3,000,000

a)Calculate cost of equity for each company using CAPM if beta firm is 1.20, risk free rate 4.8%, and market risk premium is 5.2%. Round to two decimals.

2 Marks

b)How much is WACC with 30% tax rate? Hint: capital structure comprises of one equity and two debts components. Round to two decimals.

5 marks

c)Explain why listed companies still tens to borrow when they can sell shares in stock market? What are implications of borrowing on cost of equity capital and perceived risk of business in stock market?