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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







Ordinary shares (nominal value 50 cents)









Long-term liabilities



4% Preference shares (nominal value $1)



7% Bonds redeemable after six years



Long-term bank loan









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:






Dividends per share (cents)





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.


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.

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