Reference no: EM132469451

	£m	£m	£m
Assets
Non-current assets			101
Current assets
Inventory		11
Trade receivables		21
Cash		IQ	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

• MM has just paid a dividend of £0.66 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 par value of £0.50 per share and an ex div market value of £8.30 per share.

• The long-term borrowings of MM consist of 7% bonds that are redeemable in six years' time at their par value of £100 per bond. The current ex interest market price of the bonds is £103.50.

• The preference shares of MM have a nominal value of £0.50 per share and pay an annual dividend of 8%. The ex div market value of the preference shares is £0.67 per share. MM pay tax at an annual rate of 25% per year

Requirement

Question (a) Calculate the equity value of MM using the following business valuation methods:

(i) the dividend growth model;

(ii) net asset value.

Question (b) Calculate the after-tax cost of debt of MM.

Question (c) Calculate the weighted average after-tax cost of capital for MM.

Question (d) Discuss the assumptions implicit in the use of the weighted average cost of capital for investment appraisal.