ACCA P4 Revision Mock – Questions _D11

Q1

“…financially, the firm is in a very strong position, being mainly equity financed except for a
£5m (Nominal Value), 4% coupon debenture loan which is redeemable at a 10% premium in
3 years…our target gearing level is 20% debt and 80% equity.”
Design industry data:
Average P/E ratio is 15, and average expected equity investor returns are 14% p.a.
UK Corporation Tax rate = 30%. Return on UK Treasury Bills = 5% p.a.

i want to how to caclute the cost of debt?