Ordinary shares cost of equity -312 2022-2023 FM kaplan kit

Hello sir,

The question was asking the weighted average after tax cost of capital:

for this I calculated the
loan notes cost
preference share cost of capital
Ordinary share capital

But for the ordinary share capital it is given in the question the ex div cost of equity of 12%

So do I have to to calculate the Required cost of return by using Do(1+g)
———– +g
Po

Or because we have already given the cost of equity of 12% so I don’t need to do so.

Because we are not looking for the rate of return after one year .So we can use the 12% cost of equity rate .

If we are given this rate do we have ever need to calculate it in any situation ?

can you please clarify sir,

Thanks,
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q
312 NN CO (DEC 10 – MODIFIED)
The following financial information refers to NN Co:
Current statement of financial position
$m
$m
$m
Assets
Non?current assets
101
Current assets
Inventory
11
Trade receivables
21
Cash
10
––––
42
––––
Total assets
143
––––
Equity and liabilities
Ordinary share capital
50
Preference share capital
25
Retained earnings
19
––––
Total equity
94
Non?current liabilities
Long?term borrowings
20
Current liabilities
Trade payables
22
Other payables
7
––––
Total current liabilities
29
Total liabilities
49
––––
Total equity and liabilities
143
––––
NN Co has just paid a dividend of 66 cents per share and has a cost of equity of 12%. The
dividends of the company have grown in recent years by an average rate of 3% per year. The
ordinary shares of the company have a nominal value of 50 cents per share and an ex div
market value of $8.30 per share.
The long?term borrowings of NN Co consist of 7% bonds that are redeemable in six years’
time at their nominal value of $100 per bond. The current ex interest market price of the
bonds is $103.50.
The preference shares of NN Co have a nominal value of 50 cents per share and pay an annual
dividend of 8%. The ex div market value of the preference shares is 67 cents per share.
NN Co pay profit tax at an annual rate of 25% per year.

Required:
(a)
Calculate the equity value of NN Co using the following business valuation methods:
(i)
the dividend growth model
(ii)
net asset value. ?
(5 marks)
(b)
Calculate the after?tax cost of debt of NN Co. ?
(4 marks)
(c)
Calculate the weighted average after?tax cost of capital of NN Co. ?
(6 marks)
(d)
Explain the concept of market efficiency and distinguish between strong form
efficiency and semi?strong form efficiency.