Question 1
Show all calculations steps and formula used to arrive toyour answer.
Suppose shares in Christopher Corporation have a beta of0.90. The market risk premium is 10.6% and the risk‐free rate is 8%. Christopher’slast dividend was R1.80 per share and the dividend is expected to grow at 7%indefinitely. The share currently sells for R18.00.
1.1.Calculate what Christopher’s cost of equitycapital is. (10)
1.2. Using the costof equity calculated in 1.1, if Christopher has a target debt/equityratio of 50%, its cost of debt is 8% before tax and if the tax rate is 35%,what is the WACC? (5)
1.3. If Christopher is seeking R40 million for a newproject, the necessary funds will have to be raised externally. Christopher’sflotation costs for selling debts and equity are 3% and 12% respectively. Ifthe flotation costs are considered, what is the true cost of the new project? (5)
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