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IPho Ltd has irredeemable 4% debt capital in issue with a nominal value of €20m. The current market value of the debt capital is €10 million and the tax rate is 25%. The current market value of equity shares of IPho Ltd is €30 million. The weighted average cost of capital has been determined as 10%.
The cost of equity of IPho Ltd would therefore be:
a 11.3%
b 11.8%
c 12.3%
d 12.8%Please do not simply set test questions and expect an answer.
You must have an answer in the same book in which you found the question. Ask whatever it is in the answer that you are not clear about and then I will try and help you.
(You can calculate the cost of debt from the information given. You know the total market values of debt and equity and so you can do a bit of simple algebra to calculate what the cost of equity must be to end up with a WACC of 10%)
This could not possibly be asked in Paper P4. Partly because there are no multiple choice questions in P4, and partly because it is not the sort of thing asked at P4 anyway – it is in F9 where this sort of thing just could be asked.
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