Question $1$

$(18$ marks$)$

$1\mathrm{.}1$

Outline the key financial components that are involved in calculating financial leverage, discuss the range of financial leverage that companies can exhibit and elaborate on how variations in financial leverage can influence a company's earnings per share and risk profile, particularly when confronted with distinct economic conditions.

$1\mathrm{.}2$

An analysis of the return on Courier Company $($Pty$)$ Ltd$\text{'}$s shares and the return on the JSE Index for the last four years, indicates the following:

Expected returns

Standard deviations of returns

Expected return's correlation with the market

Courier Company $|$ Market

$15\%$

$12\%$

$6\mathrm{.}2\%$

$4\mathrm{.}5\%$

$0\mathrm{.}85$

Additional information:

The risk$-$free rate is $7\%.$

The beta coefficient of the market is $3=1\mathrm{.}0$

Required:

$1\mathrm{.}2\mathrm{.}1$

Calculate the beta coefficient $($B$)$ for Courier Company and its current cost of equity.

$1\mathrm{.}2\mathrm{.}2$

Compare Courier Company's beta coefficient with that of the market and explain what the results of your comparison will mean for the company.

$1\mathrm{.}2\mathrm{.}3$ results of the company's cost of equity calculated in $1\mathrm{.}2\mathrm{.}2$ and explain what the impact thereof can have for the shareholders and the company