ACTIVE TRADERS Co wishes to calculate its current cost of capital for use as a discount...

 

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ACTIVE TRADERS Co wishes to calculate its current cost of capital for use as a discount rate in capital budgeting. The following financial information relates to ACTIVE TRADERS Co: Financial position statement extracts as at 31 December 2017 $'000 $'000 Equity Ordinary shares (nominal value 50 cents) 4,000 Reserves 18.000 22,000 Long-term liabilities 4% Preference shares (nominal value $1) 3,000 7% Bonds redeemable after six years 3,000 Long-term bank loan 1,000 7,000 29,000 The ordinary shares of ACTIVE TRADERS Co have an ex div market value of $4 70 per share and an ordinary dividend of 36-3 cents per share has just been paid. The payments made for dividend per share for previous years were 2013: 30.9 cents; 2014: 32.2 cents; 2015: 33.6 cents and for 2016: 35.0 cents. The preference shares of ACTIVE TRADERS Co are not redeemable and have an ex div market value of 40 cents per share. The 7% bonds are redeemable at a 5% premium to their nominal value of $100 per bond and have an ex interest market value of $104.50 per bond. The bank loan has a variable interest rate that has averaged 4% per year in recent years. ACTIVE TRADERS Co pays profit tax at an annual rate of 30% per year. 18/08 The Council of Community Colleges of Jamaica Page 2 ACCT3501 Required: A. Calculate the following: i. Cost of equity using the Gordon's growth model ii. Cost of preference shares iii. After-tax cost of debt (bonds) (4 marks) (2 marks) (4 marks) B. Outline the importance of determining the weighted average cost of capital. (6 marks) C. Assume Active Traders Co. is considering issuing some common stock in June 2018, the estimated beta coefficient was 0.90. The current yield on a 10-year U.S. Treasury Bond was 5.5 percent and the market-risk premium was based on a 12% expected rate of return on the market portfolio. What is the estimate of the cost of common stock for Active Traders using CAPM? (4 marks) ACTIVE TRADERS Co wishes to calculate its current cost of capital for use as a discount rate in capital budgeting. The following financial information relates to ACTIVE TRADERS Co: Financial position statement extracts as at 31 December 2017 $'000 $'000 Equity Ordinary shares (nominal value 50 cents) 4,000 Reserves 18.000 22,000 Long-term liabilities 4% Preference shares (nominal value $1) 3,000 7% Bonds redeemable after six years 3,000 Long-term bank loan 1,000 7,000 29,000 The ordinary shares of ACTIVE TRADERS Co have an ex div market value of $4 70 per share and an ordinary dividend of 36-3 cents per share has just been paid. The payments made for dividend per share for previous years were 2013: 30.9 cents; 2014: 32.2 cents; 2015: 33.6 cents and for 2016: 35.0 cents. The preference shares of ACTIVE TRADERS Co are not redeemable and have an ex div market value of 40 cents per share. The 7% bonds are redeemable at a 5% premium to their nominal value of $100 per bond and have an ex interest market value of $104.50 per bond. The bank loan has a variable interest rate that has averaged 4% per year in recent years. ACTIVE TRADERS Co pays profit tax at an annual rate of 30% per year. 18/08 The Council of Community Colleges of Jamaica Page 2 ACCT3501 Required: A. Calculate the following: i. Cost of equity using the Gordon's growth model ii. Cost of preference shares iii. After-tax cost of debt (bonds) (4 marks) (2 marks) (4 marks) B. Outline the importance of determining the weighted average cost of capital. (6 marks) C. Assume Active Traders Co. is considering issuing some common stock in June 2018, the estimated beta coefficient was 0.90. The current yield on a 10-year U.S. Treasury Bond was 5.5 percent and the market-risk premium was based on a 12% expected rate of return on the market portfolio. What is the estimate of the cost of common stock for Active Traders using CAPM? (4 marks)