Question 1

Collection AG has 3 million shares in issue. The current market price is 8 per share. The company's debt is publicly traded on the Frankfurt Stock Exchange and the most recent quote for its price was at 80% of face value. The debt has a total face value of 9 million and Collection's credit risk premium is currently 4%. The risk-free rate is 2% and the equity market risk premium is 4%. The company's equity beta is estimated at 1.3 and its corporate tax rate is 40%. Calculate Collection AG's WACC.

Question 2

Fancy Soap plc has an average market cost of borrowing of 5% per year and an equity beta of 1.1. Fancy Soap has a constant debt to equity ratio of 2:1 and a corporate tax rate of 35%. The expected return on the market portfolio is 18% and the expected risk-free rate is 3%. Calculate the WACC for Fancy Soap plc.

Question 3

Given the following data, calculate Flagship Entertainment plc's weighted average cost of capital (WACC):

Risk-free rate = 5% p.a.

Flagship's equity beta = 0.5

Flagship's current share price = 5.86

Number of Flagship shares in issue = 7.2 million

Flagship's credit risk premium = 2% p.a.

Flagship's current market value of debt = 13m

Equity risk premium = 7.5% p.a.

Flagship plc's corporate tax rate = 28%

Question 4

The companies in (i) and (ii) above have a beta greater than 1.0. Explain what an equity beta of greater than 1.0 means. What are the benefits for managers in knowing the cost of equity capital of their company?