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1) For question (a)(i), the reason why we use Ziwa’s ungeared cost of equity as Mlima’s cost of capital because we assume that Mlima is ungeared. But in the first paragraph, it clearly state that the company has significant debt borrowing. So, why we assume Mlima is ungeared ?
Please tell me the date of the exam which this question comes from. I have the past exams but I cannot remember the name of every question 🙂
Using the ungeared cost of equity is taking an adjusted present value approach, which is appropriate here because there is a significant change in the gearing.
I do explain the approach, the reasons, and assumptions in my free lectures on APV (which is fairly common in exam questions).
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