QUESTION ONE Lexton Limited has an equity beta of 1.10. The market risk premium in Zambia is expected to be 5% and the yield on government bonds is currently 7.5%. Lexton has issued bonds and its K100 par value bond is currently trading at K94.50. The coupon rate is 8%. The maturity date is five years time and the corporation tax rate is 28%. Interest is payable annually in arrears. The company has just paid the coupon interest for the current year. Required: (a) What is Lexton's cost of equity, based on the Capital Asset Pricing Model (CAPM)? (5 marks) (b) What is the after cost of debt? (5 marks) (c) Lexton paid a dividend of KO.12 per share and the dividend per share is expected to grow at 7% indefinitely. The company's share price is K2.30. What is the company's cost of equity using the dividend growth model? (8 marks) (d) What is the weighted average cost of capital (WACC) if the target debt-equity ratio is 50%? (Use the cost of equity as per CAPM) (7 marks) Total (25 marks) QUESTION TWO Cando Limited is considering investing K40 million in equipment which will generate a net cash flow of K16 million per year for four years. The company is able to depreciate the equipment at a rate of 20% per year on a straight-line for tax purposes. The market value of the equipment a the end of the four years is expected to be K15 million. The difference between the market value and the equipment's tax value (cost less depreciation to date of sale) is termed a recoupment which in this case is subject to tax. The corporation tax is 28%. The company's cost of capital is 14%. (Hint: assume depreciation is allowable as deduction before computing tax and that the tax as an outflow from the cash flows at 28%) (a) What is the project's net present value? (8 marks) (b) What is the project's IRR? (7 marks) (c) What is the project's payback (5 marks) (d) is the project viable? Justify your decision. (5 marks) Total (25 marks)