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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.

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