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NN Co. (Dec 10 – Amended)

The following financial information refers to NN Co:

Current statement of financial position







Non-current assets



Current assets






Trade receivables









Total assets



Equity and liabilities



Ordinary share capital



Preference share capital



Retained earnings



Total equity



Non-current liabilities



Long-term borrowings



Current liabilities



Trade payables



Other payables



Total current liabilities



Total liabilities



Total equity and liabilities



 NN Co has just paid a dividend of 66 cents per share and has a cost of equity of 12%. The dividends of the company have grown in recent years by an average rate of 3% per year. The ordinary shares of the company have a par value of 50 cents per share and an ex div market value of $8.30 per share.

The long-term borrowings of NN Co consist of 7% bonds that are redeemable in six years’ time at their par value of $100 per bond. The current ex interest market price of the bonds is $103.50.

The preference shares of NN Co have a nominal value of 50 cents per share and pay an annual dividend of 8%. The ex div market value of the preference shares is 67 cents per share.

NN Co pay profit tax at an annual rate of 25% per year.


A. Calculate the equity value of NN Co using the following business valuation methods:

(i) the dividend growth model
(ii) net asset value. 

B. Calculate the after-tax cost of debt of NN Co.
C. Calculate the weighted average after-tax cost of capital of NN Co.
D. Explain the concept of market efficiency and distinguish between strong form efficiency and semi-strong form efficiency.

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