Reference no: EM133178837

Question - For the following questions, assume that the tax rate is 40%, the risk-free rate is 4% and the expected market portfolio return is 8.82%.

(a) Salvatore Inc. is a motion picture production company. At the end of its most recent financial year, the firm had £500 million in interest bearing debt with interest payments of £35 million a year and an average maturity of 8 years (i.e., the firm needs to repay £500 million at the end of the next eight years and, in the meantime, make interest payments of £35 million a year each year till the end of the next 8 years). The firm's cost of debt capital is 8%. There are 50 million shares trading at £6 per share and the equity beta for the firm is 2.25. What is the weighted average cost of capital for Salvatore Inc.?

 (b) Books'R'Us, a bookstore chain, has an equity beta of 1.5, a debt-to-equity (D/E) ratio of 0.25 and 8 million shares outstanding. All of its debt is risk free. Its operations are expected to generate after-tax cash flows of £3.6 million next year, and this figure is expected to grow annually at a rate of 5%. What is the share price of Books'R'Us?