finance and accounting

crops are grown. Financing structure The following is an extract from the Statement of Financial Position of CAP Co at 30 September 202. The ordinary shares were quoted at $3 per share ex div on 30 September 20X2. The beta of CAP Co's equity shares is 0.8, the annual yield on treasury bills is 5%, and financial markets expect an average annual return of 15% on the market index. The market price per preference share was $0.90 ex div on 30 September 202. Loan notes interest is paid annually in arrears and is allowable for tax at a rate of 30%. The loan notes were priced at $100.57 ex interest per $100 nominal on 30 September 20X2. Loan notes are redeemable on 30 September 203. Assume that taxation is payable at the end of the year in which taxable profits arise. A new project Difficult trading conditions in European farming have caused CAP Co to decide to convert a number of its farms in Southern Europe into camping sites with effect from the 203 holiday season. Providing the necessary facilities for campers will require major investment, and this will be financed by a new issue of loan notes. The returns on the new campsite business are likely to have a very low correlation with those of the existing farming business. Required (a) Using the capital asset pricing model, calculate the required rate of return on equity of CAP Co at 30 September 20X2. Ignore any impact from the new campsite project. Briefly explain the implications of a Beta of less than 1 , such as that for CAP Co. (5 marks) (b) Calculate the weighted average cost of capital of CAP Co at 30 September 202 (use your calculation in answer to requirement (a) above for the cost of equity). Ignore any impact from the new campsite project