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Calculate the required rate of return on equity of abc plc

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Reference no: EM133105252

Question - ABC Plc is a company listed at the "FTSC 350" stock market. The following is an extract from the balance sheet of the Company on 30 September 2021.

 

£

Ordinary share of £1 each

500

Reserves

600

8% irredeemable £1 preference shares

300

5% bonds 2020

500

 

1,900

The ordinary shares were quoted at £4 per share ex-div on 30 September 2021. The beta of ABC plc's equity shares is 0.85; the annual yield on treasury bills is 7%, and financial markets expect an average annual return of 15% on the market index.

The market price per preference share was £1.2 ex-div on 30 September 2020.

Bond interest is paid annually in arrears and is allowable for tax at a corporation tax rate of 17%. The bonds were priced at £1.1 ex-interest per £1 nominal on 30 September 2021. The bonds mature on 30 September 2026.

Assume that taxation is payable at the end of the year in which taxable profits arise.

Required -

1. Using the capital asset pricing (CAPM) model, calculate the required rate of return on equity of ABC Plc at 30 September 2021.

2. Using your calculation in part a) above for the cost of equity, calculate the weighted average cost of capital (WACC) of ABC Plc as at 30 September 2021.

3. Critically evaluate the CAPM model and discuss whether CAPM is a good way to determine costs of equity.

Reference no: EM133105252

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