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

King Co

The statement of financial position of King Co provides the following information:




Equity finance



Ordinary shares ($1 nominal value)









Non-current liabilities



7% convertible bonds ($100 nominal value)



5% preference shares ($1 nominal value)






Current liabilities



Trade payables









Total liabilities



King Co has an equity beta of 1.2 and the ex-dividend market value of the company's equity is $125m. The ex interest market value of the convertible bonds is $21m and the ex dividend market value of the preference shares is $6.25m.

The convertible bonds of King Co have a conversion ratio of 19 ordinary shares per bond. The conversion date and redemption date are both on the same date in five years' time. The current ordinary share price of King Co is expected to increase by 4% per year for the foreseeable future.

The overdraft has a variable interest rate which is currently 6% per year and King Co expects this to increase in the near future. The overdraft has not changed in size over the last financial year,

although one year ago the overdraft interest rate was 4% per year. The company's bank will not allow the overdraft to increase from its current level.

The equity risk premium is 5% per year and the risk-free rate of return is 4% per year. King Co pays profit tax at an annual rate of 30% per year.


A. Calculate the market value after-tax weighted average cost of capital of BKB Co, explaining clearly any assumptions you make.
B. Discuss why market value weighted average cost of capital is preferred to book value weighted average cost of capital when making investment decisions.
C. Discuss the attractions to a company of convertible debt compared to a bank loan of a similar maturity as a source of finance.

Leave a Reply

Your email address will not be published.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