Question
The data given below relates to XYZ Ltd: A dividend growth model (5 Marks) Current price per share on the stock exchange $2.20 Current annual
- The data given below relates to XYZ Ltd:
- A dividend growth model (5 Marks)
Current price per share on the stock exchange $2.20
Current annual gross dividend per share $0.10
Expected average annual growth rate of dividends 7%
Beta coefficient of XYZ Ltd shares 0.5%
Expected rate of return on risk free securities 8%
Expected return on the market portfolio 12%
Required
Calculate the cost of equity of the company using:
- The Capital Asset Pricing Model (5 Marks)
- The following figures have been extracted from the most recent financial statements of Crystal Ltd:
Statement of financial position as at 30 June 2021
$000 | $000 | |
Non-Current Assets Investments Current assets Less: Current liabilities Financed by 3000000 ordinary shares of $1 each Reserves 7% Debentures Corporate tax | 3658 1735 | 9532 821 1923 12276
3000 6542 9542 1300 1434 12 276 |
Summary of profits and dividends:
Year ended 30 June: | 2017 | 2018 | 2019 | 2020 | 2021 |
$000 | $000 | $000 | $000 | $000 | |
Profit before tax Less Taxation Profit after tax Less Dividends Retained profit | 2444 1280 1164 620 544 | 2568 1164 1404 680 724 | 2878 1576 1302 740 562 | 2760 1510 1250 740 510 | 3010 1550 1460 810 650 |
Additional information
- The current market value of Crystal Ltd's ordinary shares is $3.27 per share.
- The current dividend of $810000 is due for payment shortly.
- The debentures will be redeemed at par in five years' time. The current market value is $1 400000. Annual interest has been paid on the debentures.
- Corporate tax rate is 30%.
Required
Estimate the weighted average cost of capital for the company. (10 Marks)
- The Capital asset Pricing Model offers a possible approach to the measurement of a firm's cost of capital.
Required
Give details of the model, including the assumptions on which it is based and suggest how it could be used to estimate the cost of capital of the firm. (15 Marks)
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