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Question

Below we give extracts from the annual financial statements of four companies, together with information

concerning their stock market performance. Companies A and B are producers of fruit juices and other drinks from the beverage sector. The principal activities of companies C and D are the distribution of electronic components, microprosessor systems and related equipment. Company D is also involved in the manufacture of steel building products.


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Assume that the return on government bonds is 11% and that the return on all long-term corporate loans is 12%. The market premium for risk should be assumed to be 9%.

a)    Calculate the equity cost of capital, using both the dividend model and the CAPM.

b)   Calculate the WACC for each of the four companies, assuming a corporation tax rate of 30%

c)    Using both the information given in the question, and the results of your calculations in part(a), explain why the WACC's differ between the four companies.

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Company
A
B
C
D
Latest Financial Statement Extracts:
Shareholders' funds(mNOK)
90.4
65.4
5.9
33.3
Long term bonds (mNOK)
2.8
5.8
1.1
Dividend Per Share (in NOK)
0.43
0.82
0.24
0.99
Annual Dividend growth since 2014:
12%
10%
19%
22%
Current stock market details:
Equity market value (mNOK)
68.0
63.2
68.8
123.4
Market value of long-term loans (mNOK)
0.6
0.1
0.3
Equity beta value
0.75
0.88
1.24
1.26
Share price (NOK)
16.4
28.0
30.3
47.0

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