Question 1

Dempseys Ltd has debt claims of $600 (market value) and equity claims of $400 (market value). If the cost of debt financing (before tax) is 9 per cent and the cost of equity is 16 per cent. The corporate tax rate is 30%.

Required:

What is Dempseys weighted average cost of capital?

Response template

Question 2

Cost of ordinary shares: Hallmark Tyre Ltd just paid a $1.70 dividend on its ordinary shares. If Hallmark is expected to increase its annual dividend by 6.90 per cent per year into the foreseeable future and the current price of Hallmark Tyre Ltds ordinary shares is $17.25, what is the cost of ordinary equity for Hallmark Tyre Ltd?

Answer:

Response template

Question 3

Cost of ordinary shares: Fast Way Ltd is expected to pay a dividend of $1.20 in a year from today on its ordinary shares. That dividend is expected to increase by 4 per cent every year thereafter. If the price of Fast Way Ltd shares is $13.85, what is Fast Way Ltds cost of ordinary equity?

Answer:

Response template

Question 4

WACC for a company: Share Ltd has a capital structure that is financed, based on current market values, with 21 per cent debt, 19 per cent preference shares and 60 per cent ordinary shares. If the return offered to the investors for each of those sources is 11 per cent, 12 per cent and 18 per cent for debt, preference shares and ordinary shares, respectively, then what is Share Ltds after-tax WACC? Assume that the companys corporate tax rate is 40 per cent.

Response template

Question 7

Sydney Ltd expects its growth in ordinary share dividends to be a very steady 4 per cent per year for the indefinite future. The companys share is currently selling $40, and the company just paid dividend of $3 yesterday. What is the cost of ordinary share equity for this company?

Answer:

Response template

Question 8

As at 30 June you obtain the following information for Sydney Ltd:

• The estimated required rate of return on equity after company tax but before personal tax is 20.0%
• The estimated cost of debt before tax is 8.5%
• Net debt as at 30 June 2021 is $300m
• The number of shares on issue is 350m
• The share price of Sydney is $2.00
• Assume that the effective tax rate on gross free cash flows is the current corporate tax rate (non-Base rate Entity) is 30%.

Estimate the company cost of capital which can be applied to free cash flows that have had the full rate of effective corporate tax applied them.

Response template

Question 9

Assume on the recovery of COVID-19 in BHP Ltd will be growing at a phenomenal rate of 10 per cent. It is also believed that this growth rate will be last for 4 more years and drop to 6 percent per year and remains this rate indefinitely. As well, assume that total unfranked dividend just paid were $22million for 11 million shares,

Required:

Based on non-constant growth, calculate the value of shares today assuming the required rate of return is 13 percent. What would be the total value of equity and price for each share today?

Response Template

Year	Dividend Amount
1
2
3
4
5

Year	Dividend	Discount factor	Discounted PV Amount
1
2
3
4
5
	Growth model value	-	-
5
Total			=