BUSF_A01.qxd

Appendix 4 • Suggested answers to selected problem questions

market price of a security at any given moment reflects a consensus view of the security

and therefore reflects all information that is known by investors.

9.3

If the market is efficient in the semi-strong form, then all published information is

impounded in the price of securities. The statement refers to unpublished information, and

for it to be true that this is impounded in the share price would require the market to be

strong-form efficient. Evidence shows the LSE to be semi-strong-form, but not strong-form,

efficient. Thus the statement is incorrect.

10.1 Gregoris plc

104 =+++

This looks like a return of a little below 8 per cent because the loan notes with an 8 per cent

‘coupon’ are worth more than £100. Try 7 per cent:

104 =+++

=7.48 +6.99 +6.53 +82.39

=103.39

• that is, kLis very close to 7 per cent.

10.3 Fortunate plc

Summarised prospective income statement for each future year

£m

Operating profit before interest and tax 9.0

Interest (1.2)

7.8

Taxation (50%) (3.9)

Profit for the year 3.9

Preference dividend (0.5)

Profit attributable to ordinary shareholders 3.4

Cost of debentures=12%

Cost of preference shares=×100% =15.4%

Cost of ordinary shares=×100% =26.6%

WACC=

==

=17.3%

£4,505,300

£26,050,000

£0.6m +£500,500 +£3,404,800

£10m +£3.25m +£12.8m

[12%(1 −0.50) ×£10m] +(15.4% ×5m ×£0.65) +(26.6% ×8m × 2 ×£0.80)

£10m +(5m ×£0.65) +(8m × 2 ×£0.80)

£3.4m

8m × 2 ×£0.80

£0.5m

(5m ×£0.65)

108

(1 + 0.07)^4

8

(1 + 0.07)^3

8

(1 + 0.07)^2

8

(1 + 0.07)^1

108

(1 + kL)^4

8

(1 + kL)^3

8

(1 + kL)^2

8

(1 + kL)^1

Chapter 10

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