This section has three questions. Students should answer TWO questions only.
Question 2VUITONPlc has the following information taken from the statement of financial position as:£mOrdinary shares of £0.5 each12Reserves 77% loan notes10The company’s ordinary shares are currently quoted at £1.65 each share. The loan notes are irredeemable and have a market value of £105 per £100 nominal value. VUITON pays corporate tax at 19% and is expected to earn a consistent profit of £4millionin each future year.
(a)Define the Weighted Average Cost of Capital. (10 marks)
(b)The Usingmarket values for weighting, calculate:
i.The cost of equity capital(6marks)
ii.The post-tax cost of equity capital(6 marks)
iii.Theweighted average cost of capital (8marks)Total30 marks
Question 3
NewtonPlc has the following information taken from the statement of financial position as:Equity£millionOrdinary shares of £1each25Reserves 530Non-current liabilities12% loan notes8The company is considering options of financing an investment projectwhich required an initial capital of £1million.
(a)Discuss the current capital structure for the company. (5 marks)
(b)Calculate the gearing (leverage) ratio for the company. (5 marks)
(c)Advisethe director of Newton Plc sources of financing this project and their impact on the gearing of the company.(20marks)Total30 marks
4/6Question 4
(a)Provide a graph to illustrate the Security Market Line.(5 marks)
(b)‘The CAPM model is a vital tool for corporate financial managers.’ Discuss critically.(25 marks)Total30 marks
Question 5
`Share valuation models are only as good as the data used and the context in which they are applied.’Explore this statement by comparing and contrasting three Share Pricing Models
