Question 1

1. JJ ltd has the following information in its statement of financial position. $'000

Ordinary shares of 50c 10% Irredeemable bonds

7,300 3,200

The ordinary shares are currently quoted at 115c each and the bonds are trading at $58 per $100 nominal.The ordinary dividend of 12c has just been paid with an expected growth rate of 10%. Corporation tax is currently 30%.

Required Calculate the weighted average cost of capital for JJ ltd. [15 marks]

1. Amy and Ben are a married couple aged 30 and 32 respectively, they are concerned about their heavy debt load as below:

I. Mortgage (interest at 4.5% p.a.): $2,000,000

II. Unsecured credit line (interest at 6.5% p.a.): $15,000

III. Amys student loan (interest at 10% p.a.): $40,000

IV. Amys credit card balance (interest at 18% p.a.): $10,000

Their goal is to pay off their mortgage loan as quickly as possible. List, from the FIRST to the LAST, the order in which their debt should be paid off that will be the MOST cost-effective for them. (justify your answer). [5 marks]

1. Why might shareholders prefer a current dividend to a future capital gain? [5 marks]
2. What happens if a project is discounted using its IRR as the discount rate? [5 marks]