QUESTION ONE 31 March 2015 Ordinary shares of K0.50 each The following is an extract from the balance sheet of Double Dee International PLC as at K5,200,000 Reserves 9% Preference of K1.00 14% Debentures Total Long Term Funds K4,850,000 K4.500,000 K5,000,000 K19,550,000 The ordinary shares are quoted at K0.80. Assume that the market estimate of the next ordinary dividend is K0.04) growing thereafter at 12% per annum indefinitely. The preference shares, which are irredeemable, are quoted at K0.72 and the debentures are quoted at par. Corporation tax is 33%. Required (a) Use the relevant data above to estimate the company's weighted average cost of capital (WACC), i.e. the return required by the providers of the three types of capital, using the respective market values as weighting factors. (12 marks) (b) Explain how the capital asset pricing model (CAPM) would be used as an alternative method of estimating the cost of equity, indicate what information would be required and how it would be estimated. (8 marks) Total (20 marks) QUESTION TWO (a) Mr Craig has obtained a patent on a new device that lures insects and electrocutes them once they touch a grid inside the device. He is at the stage of manufacturing the first units and marketing the device and has asked you to advise him whether he should operate as a sole trader, within a partnership, a private company or publi company. How would your advice change as the entity grows over time? (12 marks) (b) At the birth of his daughter, Mr Patrick Zulu invested K1 0,000 at 6% pa. compounde annually. What amount would accrue to her if she left the money invested until sh attained the age of () 18 years (i) 21 years; (ii) 40 years; and (iv)60 years? (2 marks) (2 marks) (2 marks) (2 marks)