Required: a) Both companies are listed on the London Stock Exchange market. Support you are a...
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Required: a) Both companies are listed on the London Stock Exchange market. Support you are a financial advisor and your clients are considering investing in both companies, explain to your clients the meaning of the beta coefficients for both companies, and the kind of information needed when evaluating the investment potential of both companies. (5 marks) b) Calculate the cost of equity for both companies using two methods. (10 marks) c) Compute the weighted average cost of capital for both entities using the information provided above (use dividend growth model for cost of equity). Market value per equity share Number of equity shares Net profit after tax Last dividend payouts Growth in dividends Coupon rate on debentures Current market price Market value of debentures (nominal value £100) ● • Jon Plc £6,000,000 £3,000,000 5% £6.00 5,000,000 6% £98 £20,000,000 Rose Pic £8,000,000 £4,000,000 8% £4.00 8,000,000 Other information: • The dividend has just been paid. ● The redemption price is set to be £101 for Jon plc's debentures, and £98 for Rose plc's debentures. Both redeemable after 5 years. The riskfree rate is 5% and the return on the market is 18%. Jon Plc is considered to have a beta of 0.9, whereas Rose Plc is considered to have a beta of 1.5. Taxation is 20%. 8% £95 £32,000,000 Required: a) Both companies are listed on the London Stock Exchange market. Support you are a financial advisor and your clients are considering investing in both companies, explain to your clients the meaning of the beta coefficients for both companies, and the kind of information needed when evaluating the investment potential of both companies. (5 marks) b) Calculate the cost of equity for both companies using two methods. (10 marks) c) Compute the weighted average cost of capital for both entities using the information provided above (use dividend growth model for cost of equity). Market value per equity share Number of equity shares Net profit after tax Last dividend payouts Growth in dividends Coupon rate on debentures Current market price Market value of debentures (nominal value £100) ● • Jon Plc £6,000,000 £3,000,000 5% £6.00 5,000,000 6% £98 £20,000,000 Rose Pic £8,000,000 £4,000,000 8% £4.00 8,000,000 Other information: • The dividend has just been paid. ● The redemption price is set to be £101 for Jon plc's debentures, and £98 for Rose plc's debentures. Both redeemable after 5 years. The riskfree rate is 5% and the return on the market is 18%. Jon Plc is considered to have a beta of 0.9, whereas Rose Plc is considered to have a beta of 1.5. Taxation is 20%. 8% £95 £32,000,000
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a Beta coefficients measure the volatility or sensitivity of a stocks returns compared to the overall market returns A beta of 1 indicates that the stock tends to move in line with the market A beta g... View the full answer
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