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:
Long term variable rate loan
Ordinary shares (nominal SOP)
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%.
Calculate væighted cost Of capital (WACC) for Otter plc, using market
Explain Why market weightings are preferable to book weightings When calculating a
Briefly evaluate the issues associated With the used above in part a) to calculate
the cost ot equity.
using diagrams to illustrate your discussion. explain how Miller and Modigliani’s (1958)
view ot capital structure changes with the introduction of taxation.
(Total: 30 marks)