Question 1 Show all calculations steps and formula used to arrive to your answer. Suppose shares in Christopher Corporation have a beta of 0.90. The market risk premium is 10.6% and the risk‐free rate...

Question 1

Show all calculations steps and formula used to arrive to
your answer.

Suppose shares in Christopher Corporation have a beta of
0.90. The market risk premium is 10.6% and the risk‐free rate is 8%. Christopher’s
last 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 equity
capital is. (10)

1.2. Using the cost
of equity calculated in
1.1, if Christopher has a target debt/equity
ratio 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 new
project, the necessary funds will have to be raised externally. Christopher’s
flotation costs for selling debts and equity are 3% and 12% respectively. If
the flotation costs are considered, what is the true cost of the new project? (5)