FN281 Exam Paper 2 June 2021

SECTION A: COMPULSORY Question — ALL students must answer question in this section

The finance director Of Otter plc Wishes to establish its cost capital for investment appraisal

The information below has been provided:

The following extract is from the statement ot position (balance sheet) of Otter as at

31″ December 2020:

Non-current Liabilities:

5% Irredeemable

Long term variable rate loan

Equity:

Ordinary shares (nominal SOP)

E2.400,ooO

The current ex-interest market price of a bond is El 05.

The ex-dividend current market price of a share is S25p. The historic growth rate of dividends has

t*en 8%. The total dividend share for 2020 was B5p.

LIBOR (London Interbank Offer Rate) is currentty I Yo, and the interest rate on the ban is %

The rate of corporation tax is 30%.

a)

b)

c)

d)

Calculate væighted cost Of capital (WACC) for Otter plc, using market

weightings.

(15 marks)

Explain Why market weightings are preferable to book weightings When calculating a

companfs WACC.

(3 marks)

Briefly evaluate the issues associated With the used above in part a) to calculate

the cost ot equity.

(4 marks)

using diagrams to illustrate your discussion. explain how Miller and Modigliani’s (1958)

view ot capital structure changes with the introduction of taxation.

(8 marks)

(Total: 30 marks)

FN2S :

3″ 2021

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