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F2: Advanced Financial Reporting
CHAPTER 2 – COST OF CAPITAL
2.1 11.8%
k e = d o (1 + g)/P o + g
k e = (0.46 × 1.04)/(6.57 – 0.46) + 0.04
NB. P o = ex div market prices. The prices quoted are cum dividend as the
dividend is yet to be paid.
2.2 B
Long dated bonds are considered the same as irredeemable bonds for cost of
debt purposes.
To calculate k d
k d = i(1-T)/P 0
P 0 = i(1-T)/k d
7 (1 – 0.3)
P 0 =
0.047
P 0 = $104.26
2.3 A
Tax has no effect on cost of equity.
WACC uses market values for the weightings, not book values.
Cost of debt uses post tax interest figures. Tax has no effect on yield to
maturity. Therefore, cost of debt will not be the same as the yield to maturity.
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