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F9 Financial Management - PDF
F9 Financial Management - PDF
F9
FINANCIAL MANAGEMENT
Study System
Sample Session
ATC
INTERNATIONAL
ACCA
PAPER F9
FINANCIAL MANAGEMENT
STUDY SYSTEM
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material in this publication can be accepted by the author, editor or publisher.
This training material has been published and prepared by Accountancy Tuition Centre Limited
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United Kingdom.
Editorial material Copyright Accountancy Tuition Centre (International Holdings) Limited, 2009.
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SESSION 00 – CONTENTS
CONTENTS
Page
19 Glossary 1901
Index 2001
(iii)
SESSION 00 – CONTENTS
(iv)
SESSION 00 – SYLLABUS
INTRODUCTION
This Study System has been specifically written for the Association of Chartered Certified
Accountants fundamentals level examination, Paper F9 Financial Management
It provides comprehensive coverage of the core syllabus areas and is designed to be used
both as a reference text and interactively with the ATC Learning System to provide you with
the knowledge, skill and confidence to succeed in your ACCA studies
SYLLABUS
AFM (P4)
Advanced Financial Management
MA (F2)
Management Accounting
Aim
Main capabilities
B Assess and discuss the impact of the economic environment on financial management
F Explain and calculate the cost of capital and the factors which affect it
(v)
SESSION 00 – SYLLABUS
Financial
management function
(A)
Working capital
management (C)
Investment appraisal
(D)
Business finance
(E)
Risk management
(H)
RATIONALE
The syllabus for Paper F9, Financial Management, is designed to equip candidates with the
skills that would be expected from a finance manager responsible for the finance function of
a business. The paper, therefore, starts by introducing the role and purpose of the financial
management function within a business. Before looking at the three key financial
management decisions of investing, financing, and dividend policy, the syllabus explores
the economic environment in which such decisions are made.
The next section of the syllabus is the introduction of investing decisions. This is done in two
stages - investment in (and the management of) working capital and the appraisal of long-
term investments.
The next area introduced is financing decisions. This section of the syllabus starts by
examining the various sources of business finance, including dividend policy and how much
finance can be raised from within the business. Cost of capital and other factors that
influence the choice of the type of capital a business will raise then follows. The principles
underlying the valuation of business and financial assets, including the impact of cost of
capital on the value of the business is covered next.
The syllabus finishes with an introduction to, and examination of, risk and the main
techniques employed in the management of such risk.
(vi)
SESSION 00 – SYLLABUS
DETAILED SYLLABUS
D Investment appraisal
(vii)
SESSION 00 – SYLLABUS
E Business finance
F Cost of capital
G Business valuations
H Risk management
(viii)
SESSION 00 – SYLLABUS
The syllabus for Paper F9 aims to develop the skills expected of a finance manager who is
responsible for the finance function of a business.
The paper also prepares candidates for more advanced and specialist study in Paper P4,
Advanced Financial Management.
15 minutes for reading and planning is given at the start if the examination. During this time
candidates may make notes on the question paper but may not write in the answer booklet.
Candidates are provided with a formulae sheet and tables of discount and annuity factors.
(ix)
SESSION 00 – TABLES AND FORMULAE
Formula sheet
2C o D
Economic order quantity =
Ch
E(ri) = Rf + βi(E(rm)–Rf)
Ve Vd (1 − T )
βa = βe + βd
(Ve + Vd (1 − T )) (Ve + Vd (1 − T ))
D O (1 + g )
PO =
(re − g )
Gordon’s growth approximation
g = bre
Ve Vd
WACC = k e + k d (1 − T )
Ve + Vd Ve + Vd
(1 + h c ) (1 + i c )
s1 = s 0 x f0 = s0 x
(1 + h b ) (1 + i b )
(x)
SESSION 00 – TABLES AND FORMULAE
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 1
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 2
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 3
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 4
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 5
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 6
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 7
8 0.923 0.853 0.789 0.731 0.667 0.627 0.582 0.540 0.502 0.467 8
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 9
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 10
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 11
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 12
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 13
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 14
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 1
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 2
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 3
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 4
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 5
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 6
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 7
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 8
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 9
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 10
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 11
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 12
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 13
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 14
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 15
(xi)
SESSION 00 – TABLES AND FORMULAE
Annuity table
1 − (1 + r ) − n
Present value of an annuity of 1 i.e.
r
Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 1
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 2
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 3
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 4
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 5
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 6
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 7
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 8
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 9
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 10
11 10.37 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 11
12 11.26 10.58 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 12
13 12.13 11.35 10.63 9.986 9.394 8.853 8.358 7.904 7.487 7.103 13
14 13.00 12.11 11.30 10.56 9.899 9.295 8.745 8.244 7.786 7.367 14
15 13.87 12.85 11.94 11.12 10.38 9.712 9.108 8.559 8.061 7.606 15
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 1
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 2
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 3
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 4
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 5
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 6
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 7
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 8
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 9
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 10
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.586 4.327 11
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439 12
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 13
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 14
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 15
(xii)
SESSION 00 – EXAM TECHNIQUE
EXAM TECHNIQUE
Time allocation
To allocate your time multiply the marks for each question by 1.8 minutes.
You should also apportion your time carefully between the parts of each question.
Do not be tempted to go over the time allocation on each question - remember the “law of
diminishing returns” the longer you spend the lower your efficiency in gaining marks. It is
more effective to move onto the next question.
Numerical elements
¾ Before starting a computation, picture your route. Do this by noting down the steps
you are going to take and imagining the layout of your answer.
¾ Use a columnar layout if appropriate. This helps to avoid mistakes and is easier for the
marker to follow.
¾ Include all your workings and cross-reference them to the face of your answer.
¾ A clear approach and workings will help earn marks even if you make an arithmetic
mistake.
¾ If you later notice a mistake in your answer, it is not worthwhile spending time
amending the consequent effects of it. The marker of your script will not punish you for
errors caused by an earlier mistake.
¾ Don’t ignore marks for written recommendations or comments based upon your
computation. These are easy marks to gain.
¾ If you write good comments based upon calculations which contain errors, you can still
receive all the marks for the comments.
¾ If you could not complete the calculations required for comment then assume an answer
to the calculations. As long as your comments are consistent with your assumed answer
you can still pick up all the marks for the comments.
(xiii)
SESSION 00 – EXAM TECHNIQUE
Written elements
Planning
¾ Read the requirements carefully at least twice to identify exactly how many points you
are being asked to address.
¾ Give your plan a structure which you will follow when you write up the answer.
Presentation
¾ Use headings and sub-headings to give your answer structure and to make it easier to
read for the marker.
¾ Use short paragraphs for each point that you are making.
¾ Use bullet points where this seems appropriate e.g. for a list of advantages/disadvantages
Style
¾ Concise, easily understood language scores good marks and requires less writing.
¾ Lots of points briefly explained tend to score higher marks than one or two points
elaborately explained.
(xiv)
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
OVERVIEW
Objective
¾ To use this model to estimate the cost of equity and the cost of debt.
SECURITY
VALUATION AND THE
COST OF CAPITAL
EQUITY DEBT
ANALYSIS ANALYSIS
1001
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
“the market value of a share or other security is equal to the present value of the
future expected cash flows from the security discounted at the investor’s required
rate of return”.
¾ Ex-div market value is the market value assuming that a dividend has just been
paid.
¾ Let:
D1 D2 D3 Dn
Po = + + .....
(1 + ke) 2 3 n
(1 + ke) (1 + ke) (1 + ke)
D
Po =
ke
¾ This version of the model can be used to determine the theoretical value of a share
which pays a constant dividend e.g. a preference share or an ordinary share in a zero
growth company.
1002
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
¾ If dividends are forecast to grow at a constant rate in perpetuity, where g = growth rate
D0(1 + g) D1
Po = =
ke − g ke − g
D O (1 + g )
PO =
(re − g )
Where re = required return of equity investors = ke
¾ rational investors
¾ all investors have the same expectations and therefore the same required rate of return
no transactions costs
large number of buyers and sellers of shares
no individual can affect the share price
all investors have all available information
¾ dividends are paid just once a year and one year apart
¾ The model can be used to estimate the theoretical fair value of shares in unlisted
companies where a quoted market price is not known. .
¾ However if the company is listed, and the share price is therefore known, the model can
be used to estimate the required return of shareholders i.e. the company’s cost of equity
finance.
1003
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
Illustration 1
Suppose that a share has a current ex-div market value of 80 cents and
investors expect a dividend of 10 cents per share to be paid each year as has
been the case for the past few years.
Using the dividend valuation model the required return of the investors for
this share can be determined:
D
Po =
ke
10c
80c =
ke
10c
ke =
80c
ke = 12.5%
Investors will all require this return from the share as the model assumes they
all have the same information about the risk of this share and they are all
rational.
If investors think that the dividend is due to increase to 15 cents each year then
at a price of 80 cents the share is giving a higher return than 12.5%. Investors
will therefore buy the share and the price will increase until, according to the
model, the value will be:
15c
Po = = 120 cents
0.125
Alternatively suppose that the investors' perception is that the dividend will
remain at 10 cents per share but that the risk of the share has increased thereby
requiring a return of 15%. If the share only gives a return of 12.5% (on an 80
cents share price) then investors will sell and the price will fall. The fair value
of the share according to the model will be:
10c
Po = = 66.7 cents
0.15
1004
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
¾ The dividend valuation model gives a theoretical value, under the assumptions of the
model, for any security.
¾ In practice there will be many factors other than the present value of cash flows from a
security that play a part in its valuation. These are likely to include:
interest rates
market sentiment
expectation of future events
inflation
press comment
speculation and rumour
currency movements
takeover and merger activity
political issues.
¾ Share prices change, often dramatically, on a daily basis. The dividend valuation model
will not predict this, but will give an estimate of the underlying fair value of the shares.
2 COST OF EQUITY
2.1 Shareholders required rate of return
D
Po =
ke
D
ke =
Po
¾ If ke is the return required by the shareholders in order for the share value to remain
constant then ke is also the return that the company must pay to its shareholders.
Therefore ke also equates to the cost of equity of the company.
¾ Therefore the cost of equity for a company with a constant annual dividend can be
estimated as the dividend divided into the ex-div share price i.e. the dividend yield.
¾ The ex-div market value is the market value of the share assuming that the current
dividend has just been paid. A cum-div market value is one which includes the value of
the dividend just about to be paid. If a cum-div market value is given then this must be
adjusted to an ex div market value by taking out the current dividend.
1005
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
Example 1
A company’s shares have a market value of $2.20 each. The company is just
about to pay a dividend of 20c per share as it has every year for the last ten
years.
Solution
¾ The model can also deal with a dividend that is growing at a constant annual rate of g.
D 0 (1 + g) D1
Po = =
ke − g ke − g
D0(1 + g)
ke = +g
Po
1006
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
Illustration 2
0.12 (1.05)
ke = + 0.05
1.75
= 12.2%
¾ The growth rate of dividends can be estimated using either of two methods.
Two methods
¾ Look at historical growth and use this to predict future growth. If you have specific
information about future growth, use that.
If dividends have grown at 5% in each of the last 20 years, predicted future growth
= 5%.
New company with very high growth rates – take care! It is unlikely to produce
such high growth in perpetuity.
No pattern – do not use this method (i.e. dividends up one year, down the next).
1007
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
Example 2
A company has paid the following dividends over the last five years.
Estimate the growth rate and the cost of equity if the current (19X4) ex div
market value is $10.50 per share.
Solution
¾ Gordon’s growth model states that growth is achieved by retention and reinvestment of
profits.
g = bre
re = return on equity
¾ Take an average of r and b over the preceding years to estimate future growth.
Retained profit
b =
Profit after tax
¾ These figures can be obtained from the statement of financial position and income
statement.
1008
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
Example 3
A company has 300,000 ordinary shares in issue with an ex-div market value of
$2.70 per share. A dividend of $40,000 has just been paid out of post-tax profits
of $100,000.
Solution
1009
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
Illustration 3
A plc is all equity financed and has 1m shares quoted at $2 each ex div. It pays
constant annual dividends of 30c per share.
It is considering adopting a project which will cost $500,000 and which is of the
same risk as its existing activities. The cost will be met by a rights issue. The
project will produce inflows of $90,000 pa in perpetuity. All inflows will be
distributed as dividends.
What is the new value of the equity in A plc and what is the gain to the
shareholders? Ignore tax.
0.30
¾ ke = = 15%
2.00
¾ New dividend
$
Existing total dividend 300,000
Dividends from the project 90,000
New total dividend 390,000
390 ,000
Value of equity =
0.15
= $2,600,000
= $100,000
90 ,000
Project NPV = ($500,000) + = $100,000
0.15
¾ Therefore the NPV of a project serves to increase the value of the company’s shares i.e.
the NPV of a project shows the increase in shareholders’ wealth.
¾ This proves that NPV is the correct method of project appraisal – it is the only method
consistent with the assumed objective of maximising shareholders’ wealth.
1010
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
D
¾ Ke =
Po
¾ Preference dividends are normally quoted as a percentage, e.g. 10% preference shares.
This means that the annual dividend will be 10% of the nominal value, not the market
value.
Example 4
A company has 100,000 12% preference shares in issue (nominal value $1).
Solution
3 COST OF DEBT
3.1 Terminology of debentures
¾ The coupon rate is the interest rate printed on the debenture certificate.
¾ Nominal value is also known as par or face value. In the exam the nominal value of one
debenture is usually $100.
¾ Market value (MV) is normally quoted as the MV of a block of $100 nominal value.
e.g. 10% debentures quoted at $95 means that a $100 block is selling for $95 and annual
interest is $10 per $100 block.
¾ Market value (cum-int) includes the value of accrued interest which is just about to be
paid.
1011
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
¾ Irredeemable debentures are a type of debt finance where the company will never repay
the principal but will pay interest each year until infinity. They are also referred to as
undated debentures.
¾ The market value of undated debt can be calculated using the same logic as the
Dividend Valuation Model:
MV (ex interest) = present value of future interest payments discounted at the debenture-
holder’s required rate of return
I
¾ MV (ex int) =
r
I
¾ r = = Interest yield
MV (ex int)
¾ The company gets tax relief on the debenture interest it pays, which reduces the cost of
debentures to the company – known as the “tax shield” on debt.
Illustration 4
Consider two companies with the same earnings before interest and tax (EBIT).
The first company uses some debt finance, the second uses no debt.
$ $
EBIT 100 100
Debt interest (10)
___ ___
Profits before tax 90 100
$3.30 difference
Therefore
Effective cost of debt
$
Debt interest 10.00
Less Tax shield (3.30)
_____
Effective cost of debt 6.70
_____
1012
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
¾ Because of tax relief, the cost to the company is not equal to the required return of the
debenture holders.
Unless told otherwise, we assume that tax relief is instant (in practice, there will be a
minimum time lag of nine months under the UK tax system).
¾ Kd can be used to denote the cost of debt – but care is needed as to whether it is stated
pre-tax or post-tax.
Example 5
12% undated debentures with a nominal value of $100 are quoted at $92 cum
interest. The rate of corporation tax is 33%.
Find
Solution
1013
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
¾ The cash flows are not a perpetuity because the principal will be repaid. However from
the dividend valuation model we can derive the following rule:
The cost of any source of funds is the IRR of the cash flows associated with that source.
¾ If we are looking at the return from an investor’s point of view, interest payments are
included gross.
¾ If we are looking at the cost to the company, we take the interest payments net of
corporation tax. Assume instant tax relief.
¾ Assume that the final redemption payment does not have any tax effects.
¾ To find the cost of debt for a company find the IRR of the following cash flows:
Time $
0 Market value (ex-interest) x
1−n Post-tax interest (x)
n Redemption value (x)
Example 6
Solution
1014
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
¾ Care should be taken not to confuse the required return of the debenture holders with
the cost of debt of the company.
¾ The cost of debt of the company is then determined by finding the IRR of the market
value, net of tax interest payments and redemption value.
MV (ex interest) = present value of future interest payments and redemption value
discounted at the debenture-holder’s required rate of return
Example 7
Solution
1015
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
¾ In practice debenture interest is usually paid every six months rather than annually.
This practical aspect can be built into our calculations for the cost of debt.
¾ If interest payments are being made every 6 months then when the IRR of the debenture
cash flows is calculated it should be done on the basis of each time period being 6
months.
¾ The IRR, or cost of debt, will then be a 6 monthly cost of debt and must be adjusted to
determine the annual cost of debt.
Example 8
What is the effective annual cost of debt for the company? Ignore corporation
tax.
Solution
1016
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
¾ Convertible debentures allow the investor to choose between redeeming the debentures
at some future date or converting them into a pre-determined number of ordinary
shares in the company.
¾ To estimate the market value it is first necessary to predict whether the investor will
choose redemption or conversion. The redemption value will be known with certainty
but the future share price can only be estimated.
MV (ex interest) = present value of future interest payments and the higher of (i)
redemption value (ii) forecast conversion value, discounted at the debenture-holder’s
required rate of return
Example 9
A company has in issue 8% coupon bonds which are redeemable at their par value of $100 in
four years’ time. Alternatively, each bond may be converted on that date into 40 ordinary
shares. The current ordinary share price is $2.10 and this is expected to grow at a rate of 7%
per year for the foreseeable future. Bondholders’ required return is 9% per year.
Required:
Solution
1017
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
¾ To find the post-tax cost of convertible debt for a company find the IRR of the following
cash flows:
Time $
0 Market value (ex-interest) x
1−n Post-tax interest (x)
n Higher of redemption value/forecast conversion value (x)
Example 10
A company has in issue some 8% convertible loan stock currently quoted at $85
ex interest. The loan stock is redeemable at a 5% premium in five years time, or
can be converted into 40 ordinary shares at that date. The current ex-div
market value of the shares is $2 per share and dividend growth is expected at
7% per annum. Corporation tax is 33%.
Solution
1018
SESSION 10 – SECURITY VALUATION AND THE COST OF CAPITAL
Key points
³ If the market price of a security is already known then the model can be re-
arranged to find the required return of investors’ i.e. the company’s cost of
equity/debt finance.
³ Care must be taken with the cost of debt as interest, unlike dividends, is a
tax allowable expense form the side of the company.
FOCUS
You should now be able to:
1019
7