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FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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![QUESTION FOUR (4)
Lexton Limited has an equity beta of 1.10. The market risk premium in Zambia is expected
CRM RA
to be 5% and the yield on government bonds is currently 7.5%. Lexton has issued bonds
and its K100 par value bond is currently trading at K94.50. The coupon rate is 8%. The
maturity date is five years' time and the corporation tax rate is 28%. Interest is payable
annually in arrears, The company has just paid the coupon interest for the current year.
REQUIRED:
a) What is Lexton's cost of equity, based on the Capital Asset Pricing Model (CAPM)?
(5 Marks)
b) What is the after cost of debt?
(5 Marks)
c) Lexton paid a dividend of KO.12 per share and the dividend per share is expected to
grow at 7% indefinitely. The company's share price is K2.30. What is the company's
cost of equity using the dividend growth model?
(8 Marks)
d) What is the weighted average cost of capital (WACC) if the target debt-equity ratio is
50%? (Use the cost of equity as per CAPM)
(7 Marks)
[TOTAL: 25 MARKS]
•Ke= 0.75 +0.05 (1.10) -kd (1.-1
0-80599
we (20) / (1-1)
-0.05 (1) 164
712-425
Page 6 of 15
14341-0-28)
68.04
50(149)
-2.461](https://content.bartleby.com/qna-images/question/d221770e-bf15-4028-bd6b-18893797f624/89c91094-be6a-47b6-bc2d-71fc73170fb2/qvs6zck_thumbnail.jpeg)
Transcribed Image Text:QUESTION FOUR (4)
Lexton Limited has an equity beta of 1.10. The market risk premium in Zambia is expected
CRM RA
to be 5% and the yield on government bonds is currently 7.5%. Lexton has issued bonds
and its K100 par value bond is currently trading at K94.50. The coupon rate is 8%. The
maturity date is five years' time and the corporation tax rate is 28%. Interest is payable
annually in arrears, The company has just paid the coupon interest for the current year.
REQUIRED:
a) What is Lexton's cost of equity, based on the Capital Asset Pricing Model (CAPM)?
(5 Marks)
b) What is the after cost of debt?
(5 Marks)
c) Lexton paid a dividend of KO.12 per share and the dividend per share is expected to
grow at 7% indefinitely. The company's share price is K2.30. What is the company's
cost of equity using the dividend growth model?
(8 Marks)
d) What is the weighted average cost of capital (WACC) if the target debt-equity ratio is
50%? (Use the cost of equity as per CAPM)
(7 Marks)
[TOTAL: 25 MARKS]
•Ke= 0.75 +0.05 (1.10) -kd (1.-1
0-80599
we (20) / (1-1)
-0.05 (1) 164
712-425
Page 6 of 15
14341-0-28)
68.04
50(149)
-2.461
Expert Solution
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