Exe plc is a company that specialises in producing sustainable packaging for toys. They are interested in investing in a new production facility to meet increasing demands. You have been working as a business analyst for the organisation and have identified a potential opportunity. The first item on your agenda is to calculate the cost of capital for Exe plc so you can apply it to the project. To help you with this, the finance director has given you the following financial'information Balance Sheet € Fixed Assets 3,300,000 Current Assets 1,400,000 760,000 Current Liabilities Financed By Ordinary Share Capital @50c Each 10% Debentures 2,500,000 900,000 8% Convertible Bonds 500,000 The rate of return of a 10-year government bond is 3%, the market return is 8% and the equity beta is 1.7. The shares of Exe plc are currently trading at €3 per share. The current market value of the debentures is €110 per €100 nominal value. They are redeemable in 6 years' time at a premium of 5%. The convertible bonds are currently trading at €105 per €100 nominal and are due to be redeemed in five years' time. They are convertible into ordinary shares at a rate of 30 shares per €100 nominal value. The share price is currently €3 and is expected to grow at a rate of 1.5% per annum. Taxation is at 12% and is payable one year in arrears. Required a) Determine the cost of equity for Exe plc b) Determine the cost of debt for Exe plc
Exe plc is a company that specialises in producing sustainable packaging for toys. They are interested in investing in a new production facility to meet increasing demands. You have been working as a business analyst for the organisation and have identified a potential opportunity. The first item on your agenda is to calculate the cost of capital for Exe plc so you can apply it to the project. To help you with this, the finance director has given you the following financial'information Balance Sheet € Fixed Assets 3,300,000 Current Assets 1,400,000 760,000 Current Liabilities Financed By Ordinary Share Capital @50c Each 10% Debentures 2,500,000 900,000 8% Convertible Bonds 500,000 The rate of return of a 10-year government bond is 3%, the market return is 8% and the equity beta is 1.7. The shares of Exe plc are currently trading at €3 per share. The current market value of the debentures is €110 per €100 nominal value. They are redeemable in 6 years' time at a premium of 5%. The convertible bonds are currently trading at €105 per €100 nominal and are due to be redeemed in five years' time. They are convertible into ordinary shares at a rate of 30 shares per €100 nominal value. The share price is currently €3 and is expected to grow at a rate of 1.5% per annum. Taxation is at 12% and is payable one year in arrears. Required a) Determine the cost of equity for Exe plc b) Determine the cost of debt for Exe plc
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Question 1
Exe plc is a company that specialises in producing sustainable packaging for toys.
They are interested in investing in a new production facility to meet increasing
demands. You have been working as a business analyst for the organisation and have
identified a potential opportunity.
The first item on your agenda is to calculate the cost of capital for Exe plc so you can
apply it to the project. To help you with this, the finance director has given you the
following financial information
Balance Sheet
Fixed Assets
3,300,000
1,400,000
760,000
Current Assets
Current Liabilities
Financed By
Ordinary Share Capital @50c Each
10% Debentures
2,500,000
900,000
500,000
8% Convertible Bonds
The rate of return of a 10-year government bond is 3%, the market return is 8% and
the equity beta is 1.7. The shares of Exe plc are currently trading at €3 per share.
The current market value of the debentures is €110 per €100 nominal value. They are
redeemable in 6 years' time at a premium of 5%.
The convertible bonds are currently trading at €105 per €100 nominal and are due to
be redeemed in five years' time. They are convertible into ordinary shares at a rate of
30 shares per €100 nominal value. The share price is currently €3 and is expected to
grow at a rate of 1.5% per annum.
Taxation is at 12% and is payable one year in arrears.
Required
a) Determine the cost of equity for Exe plc
b) Determine the cost of debt for Exe plc
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