Calculate Ndovu plc’s weighted average cost of capital, based on the CAPM computed cost of equity. Discuss the appropriateness of using the weighted average cost of capital calculated above as Ndovu plc’s discount rate.
Calculate Ndovu plc’s weighted average cost of capital, based on the CAPM computed cost of equity. Discuss the appropriateness of using the weighted average cost of capital calculated above as Ndovu plc’s discount rate.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
-
Calculate Ndovu plc’s weighted average cost of capital, based on the CAPM computed
cost of equity . -
Discuss the appropriateness of using the weighted average cost of capital calculated above as Ndovu plc’s discount rate.
Transcribed Image Text:8.7 Ndovu plc is considering investing in a new project and, in the past, it would have used a cost of capital of 10 per cent as the discount rate to assess new projects.
This rate had been calculated by a team of consultants about seven years ago. However, the business feels that it would like to re-calculate its cost of capital, based
on its current capital structure. This will be used as the discount rate for future projects.
A summary of Ndovu plc's latest statement of financial position for the year ended 30 November Year 9 is given below, together with additional information:
Statement of financial position as at 30 November Year 9
£000
ASSETS
Total assets
708,680
EQUITY AND LIABILITIES
Equity
Share capital
Retained earnings
50,000
369,470
419,470
Non-current liabilities
8% Year 14 Loan notes
150,000
7% Bank loans
120,000
270,000
Current liabilitie
19,210
Total equity and liabilities
708,680
Each share has a nominal value of £0.25 and Ndovu plc's P/E ratio is 11. It is the business's policy to have a dividend payout ratio of 40 per cent and the most
recently declared dividends for the year to 30 November Year 9 were £0.18 per share. The rate of increase of the dividends has been stable over the past five years,
increasing from £0.14 per share to the current rate. The risk-free rate of return is currently estimated as 5 per cent and the market return is estimated to be 10 per
cent. Ndovu plc's most recent beta was given as 0.75.
The loan notes are redeemable in exactly five years at par and are currently trading at £103 per £100. Both the loan notes and the bank loan are secured on the
non-current assets of Ndovu plc.
Ndovu plc pays tax at 25 per cent and tax is payable in the year incurred.
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