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Category > Accounting Posted 16 May 2017 My Price 7.00

Burse Co wishes to calculate its weighted average cost of capital

Question 1

Burse Co wishes to calculate its weighted average cost of capital and the following information relates to the company at the current time:

 

Number of ordinary shares

20 million

Book value of 7% convertible debt

$29 million

Book value of 8% bank loan

$2 million

Market price of ordinary shares

$5.50 per share

Market value of convertible debt

$107.11 per $100 bond

Equity beta of Burse Co

1.2

Risk-free rate of return

4.7%

Equity risk premium

6.5%

Rate of taxation

30%

 

Burse Co expects share prices to rise in the future at an average rate of 6% per year. The convertible debt can be redeemed at par in eight years’ time, or converted in six years’ time into 15 shares of Burse Co per $100 bond.

 

Required:

 

(a) Calculate the market value weighted average cost of capital of Burse Co. State clearly any assumptions that you make. (12 marks)

(b) Discuss the circumstances under which the weighted average cost of capital can be used in investment appraisal. (6 marks)

 

(c) Discuss whether the dividend growth model or the capital asset pricing model offers the better estimate of the cost of equity of a company. (7 marks)

Answers

Alpha Geek
(8)
Status NEW Posted 16 May 2017 07:05 AM My Price 7.00

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Attachments

file 1494918107-Answer.docx preview (422 words )
Q-----------ues-----------tio-----------n 1----------- B-----------urs-----------e C-----------o w-----------ish-----------es -----------to -----------cal-----------cul-----------ate----------- it-----------s w-----------eig-----------hte-----------d a-----------ver-----------age----------- co-----------st -----------of -----------cap-----------ita-----------l a-----------nd -----------the----------- fo-----------llo-----------win-----------g i-----------nfo-----------rma-----------tio-----------n r-----------ela-----------tes----------- to----------- th-----------e c-----------omp-----------any----------- at----------- th-----------e c-----------urr-----------ent----------- ti-----------me:----------- N-----------umb-----------er -----------of -----------ord-----------ina-----------ry -----------sha-----------res----------- 20----------- mi-----------lli-----------on ----------- Bo-----------ok -----------val-----------ue -----------of -----------7% -----------con-----------ver-----------tib-----------le -----------deb-----------t $-----------29 -----------mil-----------lio-----------n -----------Boo-----------k v-----------alu-----------e o-----------f 8-----------% b-----------ank----------- lo-----------an -----------$2 -----------mil-----------lio-----------n -----------Mar-----------ket----------- pr-----------ice----------- of----------- or-----------din-----------ary----------- sh-----------are-----------s $-----------5.5-----------0 p-----------er -----------sha-----------re ----------- Ma-----------rke-----------t v-----------alu-----------e o-----------f c-----------onv-----------ert-----------ibl-----------e d-----------ebt----------- $1-----------07.-----------11 -----------per----------- $1-----------00 -----------bon-----------d -----------Equ-----------ity----------- be-----------ta -----------of -----------Bur-----------se -----------Co -----------1.2----------- R-----------isk------------fr-----------ee -----------rat-----------e o-----------f r-----------etu-----------rn
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