Chisipite plc has been listed on a stock exchange for 30 years and now has a large
number of diverse shareholders none of whom exceeds a 5% stake. It has sought to
raise the annual dividend per share by at least 1% per annum and has never cut its
dividend even during years of low profits.
The company now has a new chief executive officer who wishes to quickly develop
the company through a major project.
Summarised financial statements for the last financial year for Chisipite plc
Income statement £'000
Revenue 1,000,000
Cost of sales ( 550,000)
Gross profit 450,000
Overhead expenses ( 220,000)
Operating profit 230,000
Interest payable ( 50,000)
Profits before tax 180,000
Corporation tax ( 36,000)
Earnings 144,000
Dividends ( 90,000)
Retained earnings 54,000
Statement of financial position
Share capital 25,000
Share premium 250,000
Retained earnings 300,000
Total equity 575,000
Non-current liabilities
10 year loan notes 5% 1,000,000
Capital employed 1,575,000
Other information
Current share price £ 60.00
Interest rate on loan notes 5.0%
Beta factor for Chisipite plc 1.14
Equity risk premium 3.4%
Yield on government bonds 2.3%
Gross profit margin 45.0%
Tax rate 20.0%
NEED TO CALCULATE
1 Calculate Chisipite’s cost of equity capital using the capital asset pricing
model. Calculate the weighted average cost of capital and use this to
calculate the net present value of the project.
2 Calculate Chisipite plc’s capital gearing ratio, interest cover ratio and
dividend cover ratio for the last financial year.