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Burse Co wishes to calculate its weighted average cost of capital and the following information relates to the company at the current time:

 

Number of ordinary shares 20 million
Book value of 7% convertible debt $29 million
Book value of 8% bank loan $2 million
Market price of ordinary shares $5.50 per share
Market value of convertible debt   $107.11 per $100 bond
Equity beta of Burse Co 1.2
Risk-free rate of return 4.70%
Equity risk premium 6.50%
Rate of taxation 30%

 

Burse Co expects share prices to rise in the future at an average rate of 6% per year. The convertible debt can be redeemed at par in eight years’ time, or converted in six years’ time into 15 shares of Burse Co per $100 bond.

Requirements:

a
  1.  

Calculate the market value weighted average cost of capital of Burse Co. State clearly any assumptions that you make.     

Marks: 13
b

Discuss whether the dividend growth model or the capital asset pricing model offers the better estimate of the cost of equity of a company.  

Marks: 7

Answers submitted

Created by Ref Marking Action
Rakhi Gupta's picture
Rakhi Gupta
11/09/2020 - 13:50
a
10094
13
Rakhi Gupta's picture
Rakhi Gupta
11/09/2020 - 14:41
b
10096
7
Rakhi Gupta's picture
Rakhi Gupta
11/07/2020 - 01:03
a
10040
13
Apurba nandy's picture
Apurba nandy
03/03/2020 - 19:52
a
9026
13
Apurba nandy's picture
Apurba nandy
12/01/2019 - 18:47
a
6228
13
Apurba nandy's picture
Apurba nandy
12/01/2019 - 19:03
a
8302
13
Apurba nandy's picture
Apurba nandy
12/01/2019 - 20:01
b
8304
7
Masum Billah's picture
Masum Billah
11/06/2019 - 16:49
a
7878
9 / 13
Tanbirul Kabir Tanbir's picture
Tanbirul Kabir ...
11/06/2019 - 16:53
a
7874
10 / 13
Tanbirul Kabir Tanbir's picture
Tanbirul Kabir ...
11/06/2019 - 16:43
b
7876
6 / 7
Sohel Miah's picture
Sohel Miah
10/03/2019 - 12:44
b
7538
7
Subrata Banik's picture
Subrata Banik
08/24/2019 - 02:55
a
7004
13
Md. Mahmudul Hasan Shimul's picture
Md. Mahmudul Ha...
06/06/2019 - 21:51
a
6660
13
Quazi Shrot's picture
Quazi Shrot
05/25/2019 - 01:26
a
6420
13
Apurba nandy's picture
Apurba nandy
05/19/2019 - 17:01
b
6230
7
Jahirul Kaosar Rakib's picture
Jahirul Kaosar Rakib
05/19/2019 - 16:46
a
6214
13
Jahirul Kaosar Rakib's picture
Jahirul Kaosar Rakib
05/19/2019 - 17:03
b
6238
7