Hi John
I have a question in paper DEC 12, for the Q1. part(a), when the examiner calculate the b, I know it is should be 0.4. but I think it is a little bit wrong, because b=capital expenditure/gross free cash flow. the question stats that 2600000was estimated after taking into the taxation. interest and reinvestment, which means that 2600000 is not a gross free cash flow, it is a net free cash flow. so I want to ask why the examiner use the 0.4directly as b? thanks
another Q from the JUNE 13, the Q1, and part (i), the question required to calculate the cost of capital not the cost of the equity, even cost of capital is based on the Ziwa's ungeared equity. why the examiner just calculate the cost of equity as a cost of capital?
thanks ahead!
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P4 DEC 12& JUNE 13
11y ago#1December 2012:
b is the proportion of the free cash flow to equity that is retained (and therefore is able to generate growth). The question specifically says that it is 40% (or 0.4).
11y ago#2June 2013:
Part (i) of the question specifically says that the cost of capital should be the ungeared cost of equity (and the answer explains why).
For the JUNE13. the question says that the cost of capital should be based on the ungeared cost of equity, not exactly same with the ungeared cost of equity. I know the cost of capital should be based on when calculated them.
11y ago#4Maybe he could have worded it a bit better, but he did mean for the ungeared cost of equity to be used as the cost of capital.
ok thanks
11y ago#6You are welcome :-)
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