Reference no: EM132469451

• MM has just paid a dividend of £0.66 per share and has a cost of equity of 12%. The dividends of the company have grown in recent years by an average rate of 3% per year. The ordinary shares of the company have a par value of £0.50 per share and an ex div market value of £8.30 per share.

• The long-term borrowings of MM consist of 7% bonds that are redeemable in six years' time at their par value of £100 per bond. The current ex interest market price of the bonds is £103.50.

• The preference shares of MM have a nominal value of £0.50 per share and pay an annual dividend of 8%. The ex div market value of the preference shares is £0.67 per share. MM pay tax at an annual rate of 25% per year

Requirement

Question (a) Calculate the equity value of MM using the following business valuation methods:

(i) the dividend growth model;

(ii) net asset value.

Question (b) Calculate the after-tax cost of debt of MM.

Question (c) Calculate the weighted average after-tax cost of capital for MM.

Question (d) Discuss the assumptions implicit in the use of the weighted average cost of capital for investment appraisal.