On 1 January 20X1, a company had:
• Cost of equity of 10 0%.
• Cost of debt of 5.0%
• Debt of $100Mmilion
• 100 million $1 shares trading at $4.00 each.
On 1 February 20X1:
• The company's share police fell to $3.00.
• Debt and the cost of debt remained unchanged
The company does not pay tax.
Under Modigliani and Miller's theory without lax. what is the best estimate of the movement in the cost of equity as a result of the fall in ne share price?
Listed Company A has prepared a valuation of an unlisted company. Company B. to achieve vertical integration Company A is intending to acquire a controlling interest in the equity of Company B and therefore wants to value only the equity of Company B.
The assistant accountant of Company A has prepared the following valuation of Company B's equity using the dividend valuation model (DVM):
Where:
• S2 million is Company B's most recent dividend
• 5% is Company B's average dividend growth rate over the last 5 years
• 10% is a cost of equity calculated using the capital asset pricing model (CAPM), based on the industry average beta factor
Which THREE of the following are valid criticisms of the valuation of Company B's equity prepared by the assistant accountant?
The directors of a multinational group have decided to sell off a loss-making subsidiary and are considering the following methods of divestment:
1. Trade sale to an external buyer
2. A management buyout (MBO)
The MBO team and the external buyer have both offered the same price to the parent company for the subsidiary.
Which of the following is an advantage to the parent company of opting for a MBO compared to a trade sale as the preferred method of divestment?
Company A is identical in all operating and risk characteristics to Company B, but their capital structures differ.
Company B is all-equity financed. Its cost of equity is 17%.
Company A has a gearing ratio (debt:equity) of 1:2. Its pre-tax cost of debt is 7%.
Company A and Company B both pay corporate income tax at 30%.
What is the cost of equity for Company A?
TESTED 27 Apr 2024
