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NN Co. (Dec 10 – Amended)

The following financial information refers to NN Co:

Current statement of financial position

 $m$m Assets Non-current assets 101 Current assets Inventory 11 Trade receivables 21 Cash 10 42 Total assets 143 Equity and liabilities Ordinary share capital 50 Preference share capital 25 Retained earnings 19 Total equity 94 Non-current liabilities Long-term borrowings 20 Current liabilities Trade payables 22 Other payables 7 Total current liabilities 29 Total liabilities 49 Total equity and liabilities 143

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.

Required:

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.