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The equity beta of Fence Co is 0.9 and the company has issued 10 million ordinary shares. The market value of each ordinary share is $7.50. The company is also financed by 7% bonds with a nominal value of $100 per bond, which will be redeemed in seven years' time at nominal value. The bonds have a total nominal value of $14 million. Interest on the bonds has just been paid and the current market value of each bond is $107.14.

Fence Co plans to invest in a project which is different to its existing business operations and has identified a company in the same business area as the project, Hex Co.  The equity beta of Hex Co is 1.2 and the company has an equity market value of $54 million. The market value of the debt of Hex Co is $12 million.

The risk-free rate of return is 4% per year and the average return on the stock market is 11% per year. Both companies pay corporation tax at a rate of 20% per year.

 

 

 

Requirements:

a

(i) Calculate the current weighted average cost of capital of Fence Co.

(ii) Calculate cost of equity which could be used in appraising the new project.

Marks: 12
b

Explain the difference between systematic and unsystematic risk in relation to portfolio theory and the capital asset pricing model.

Marks: 4
c

Explain the limitations of the capital asset pricing model.

Marks: 4

Answers submitted

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Md Hasan Uz Zaman's picture
Md Hasan Uz Zaman
11/19/2020 - 23:56
b
6528
4
Rakhi Gupta's picture
Rakhi Gupta
11/03/2020 - 14:33
b
10004
4
Rakhi Gupta's picture
Rakhi Gupta
11/03/2020 - 14:49
c
10006
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Rakhi Gupta
11/02/2020 - 23:14
a
10002
12
Abhro Gourab Das's picture
Abhro Gourab Das
09/04/2020 - 17:30
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9606
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Abhro Gourab Das
09/04/2020 - 15:52
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9602
12
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Lokonath Debnath
08/22/2020 - 12:12
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9484
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Nafeez Imtiaz H...
05/08/2020 - 22:11
a
9168
12
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Apurba nandy
03/04/2020 - 00:55
a
9036
12
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Abhro Gourab Das
03/03/2020 - 19:40
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6890
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Tanzeer UL Alaam
12/03/2019 - 19:59
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8362
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Tanzeer UL Alaam
12/03/2019 - 19:35
a
7814
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Apurba nandy
12/02/2019 - 01:00
a
8314
12
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Apurba nandy
12/02/2019 - 01:01
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5666
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Apurba nandy
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7822
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Apurba nandy
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b
8316
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Apurba nandy
12/02/2019 - 01:47
c
8318
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