CAP plc is a listed company that owns and operates a large number of farms throughout the

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Question:

CAP plc is a listed company that owns and operates a large number of farms throughout the world. A variety of crops are grown. The following is an extract from the balance sheet of CAP plc at 30 September 2009.

K million

Ordinary shares of K1 each 200

Reserves 100

9% irredeemable K1 preference shares 50

8% loan stock 2010 250

600

The ordinary shares were quoted at K3 per share ex dividend on 30 September 2009. The beta of CAP plc's equity shares is 0.8, the annual yield on treasury bills is 5%, and financial markets expect an average annual return of 15% on the market index. The market price per preference share was K0.90 ex dividend on 30 September 2009. Loan stock interest is paid annually in arrears. The loan stock was priced at K100.57 ex interest per K100 nominal on 30 September 2009. Loan stock is redeemable on 30 September 2010.

Difficult trading conditions in European farming have caused CAP to decide to convert a number of farms in Southern Europe into camping sites with effect from the 2010 holiday season. Providing the necessary facilities for campers will require major investment, and this will be financed by a new issue of loan stock. The returns of the new campsite business are likely to have a very low correlation with those of the existing farming business.

Briefly explain the meaning of CAP plc's equity beta of 0.8.
Using the capital asset pricing model, calculate the required rate of return on equity of CAP plc at 30 September 2009. Ignore the impact of the new campsite.

Calculate the weighted average cost of capital of CAP plc at 30 September 2009 using market values as weighting factors. Ignore any impact from the new campsite project