Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

  1. The data given below relates to XYZ Ltd:
    1. 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:

  1. The Capital Asset Pricing Model (5 Marks)
  2. 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

  1. The current market value of Crystal Ltd's ordinary shares is $3.27 per share.
  2. The current dividend of $810000 is due for payment shortly.
  3. 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.
  4. Corporate tax rate is 30%.

Required

Estimate the weighted average cost of capital for the company. (10 Marks)

  1. 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)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Introduction To Financial Accounting

Authors: Anne Marie Ward, Andrew Thomas

9th Edition

1526803003, 978-1526803009

More Books

Students also viewed these Accounting questions

Question

How are Engagement Letters dealt with in a group situation?

Answered: 1 week ago

Question

The feeling of boredom.

Answered: 1 week ago