ZBG Plc wishes to calculate its weighted average cost of capital and the following information relating to the company at the current time:

Number of ordinary shares 20 million

Book value of 8% bank loan $2 million

Book value of 6% loan notes $8 million

The market price of ordinary shares $5.50 per share

Equity beta of ZBG Plc 1.2

The risk-free rate of return 4.7%

The risk premium on the market 6.5%

Rate of taxation 20%

The 6% loan notes of ZBG Plc are currently trading at $90 per loan note and their nominal value is $100 per loan note. ZBG Plc has a yield to maturity (YTM) on its loan notes of 7.1%.

Required:

1. Explain what is the difference between systematic and unsystematic risk.

2. Calculate the market value-weighted average cost of capital of ZBG Co.

3. Discuss whether the CAPM model or the Constant Dividend Growth Model is better when calculating the cost of equity.

Answer rating: 100% (QA)

The difference between systematic and unsystematic risk is as follows Systematic risk refers to risk that affects a broad market or economy such as ec... View the full answer