Answering Questions

  • Read each question carefully.
  • When you answer a question, your answer will automatically be saved.
  • You can revisit questions and change your answers at any time during the exam.
  • The only permitted characters for numerical answers are:
    • Numbers
    • One full stop as a decimal point if required
    • One minus symbol at the front of the figure if the answer is negative.

              For example: -10234.35

No other characters, including commas, are accepted.

Navigating between questions

  • Click Next Button to move to the next question.
  • Click Previous Button to move back to the previous question.
  • Click on a question number from the Exam Progress Details panel (see next page) to move directly to that question.
  • A message will be displayed when you click to move away from a question which has been partially attempted. You can choose to stay on the question and review your answer(s) or continue.
  • When reviewing your answer(s) for partially attempted questions ensure you read any message displayed in red text below the question in Section A or below the question
    part(s) in Section B
    .

AMH Co (June 13 Amended)

AMH Co wishes to calculate its current cost of capital for use as a discount rate in investment appraisal. The following financial information relates to AMH Co:

Financial position statement extracts as at 31 December 20X2

 

$000

$000

Equity

 

 

Ordinary shares (nominal value 50 cents)

4,000

 

Reserves

18,000

 

 

 

22,000

Long-term liabilities

 

 

4% Preference shares (nominal value $1)

3,000

 

7% Bonds redeemable after six years

3,000

 

Long-term bank loan

1,000

 

 

 

7,000

 

 

29,000

The ordinary shares of AMH Co have an ex div market value of $4.70 per share and an ordinary dividend of 36.3 cents per share has just been paid. Historic dividend payments have been as follows:

Year

20X8

20X9

20Y0

20Y1

Dividends per share (cents)

30.9

32.2

33.6

35.0

The preference shares of AMH Co are not redeemable and have an ex div market value of 40 cents per share.

The 7% bonds are redeemable at a 5% premium to their nominal value of $100 per bond and have an ex interest market value of $104.50 per bond.

The bank loan has a variable interest rate that has averaged 4% per year in recent years. AMH Co pays profit tax at an annual rate of 30% per year.

Required:

A. Calculate the market value weighted average cost of capital of AMH Co.
B. Discuss how the capital asset pricing model can be used to calculate a projectspecific cost of equity for AMH Co, referring in your discussion to the key concepts of systematic risk, business risk and financial risk.

Leave a Reply

Your email address will not be published. Required fields are marked *