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F2: Advanced Financial Reporting

CHAPTER 2 – COST OF CAPITAL

2.1 JS Plc’s ordinary shares have a current market price of $6.57. Dividends are
expect to grow by 4% and dividends of $0.46 are about to be paid.

Calculate the cost of equity to 1 decimal place.

2.2 JW has in issue £80 million of long-dated bonds issued at par with a coupon
rate of 7%. The cost of debt (k d) is 4.7%.

The corporate income tax rate is 30%.

The ex-interest market price of the bond is:

A $100.00

B $104.26

C $107.00

D $108.26

2.3 Which one of the following statements is correct?

A The same method of calculating cost of debt is used for irredeemable
bonds and redeemable bonds traded at par.

B Cost of equity uses post tax dividends within its calculation.

C WACC uses book values of debt and equity to determine the weighting of
an entity’s various forms of finance.

D The cost of debt for redeemable bonds is the same as the yield to maturity
for a redeemable bond.

2.4 Milly Ltd has issued 1 million redeemable 8% bonds with a par value of $100.
The market value of the bonds at issue is $93. They are redeemable in 3 years’
time at par.

Tax is charged at 25%.

Calculate the cost of debt of these bonds to 2 decimal places.

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