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AJT Co has a gearing ratio (debt:(equity + debt)) of 30%, and pays corporation tax of 25%.
A share in AJT has a beta of 1.2. The risk free rate is 5% and the market return is 12%.
What is the cost of equity for AJT?
16.10%
A machine costs $72,000 and has a maximum life of 3 years.The running costs each year are as follows:
Year 1: 7,200
Year 2: 9,600
Year 3: 12,000
The estimated scrap values are as follows:
After 1 year: 24,000
After 2 years: 16,600
After 3 years: 9,600
The cost of capital is 15%
What is the equivalent annual cost if the company decides to replace the machine every 2 years?Help me out, am getting lost somewhere.
Please do not ask two questions muddled in together – ask them in separate threads.
First question:
You have either misread the question or you have copied it wrongly.
The question says that the asset beta is 1.2 (not that the share has a beta of 1.2).So….you need to calculate the equity beta (using the asset beta formula on the formula sheet). The you can use that in the CAPM formula to calculate the cost of equity,
Question 2:
You need to calculate the PV of one machine. For a two year replacement, the flows are
0 (72000)
1 (7200)
2 7000 (16600 – 9600)Then you divide this PV by the 2 year annuity discount factor at 15% to get the EAC.
(The free lecture on this might be helpful to you)
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