# Using the constant growth model assumptions

Marks Allocation Question 1 List all the assumptions (6 marks) The Book Value Capital Structure for KB (3 marks) The Market Value Capital Structure for KB (3 marks) Total 12 marks Question 2 Cost of Long Term Debt The before tax cost of long-term debt publically traded 3 marks The before tax cost of long-term debt issue privately held 2 marks Cost of Equity Using the constant growth model assumptions including calculation of dividend growth rate using geometric mean 3 marks The cost of equity 3 marks Calculating the cost of equity (re) as per the CAPM, 3 marks Comments on the cost of equity from the above models 1 mark (Total 15 marks) Question 3 Which one of the two cost equities should be used with reasons? 3 marks The cost capital is weighted-average cost of capital (WACC) formula: 2 marks The cost of capital based on book value: 3 marks Based on market value, the cost of capital: 3 marks Based on Miller Modigliani proposition: Beta of assets 2 marks Return on ungeared firm 3 marks Using MM proposition 2 incorporating corporate taxes: 3 marks 2 Why the capital asset pricing model is not used to estimate the firms cost of capital directly ? 6 marks (Total 25 marks) Question 4 The implication of using the book value in the capital structure determination. Could be illustrated with a graph/diagram. 8 marks Question 5 Why using the book value or the market value of the firms capital in the determination of the cost of capital is considered superior? Weakness of book value 2 marks Strengths of market value 4 marks (Total 6 marks) Question 6 Specify the requirement as to how a firms cost of capital may be used as the hurdle rate to evaluate acquisition. 3 marks Apply the condition to evaluate the acquisition of Bartoni Foods in this case by comparing its risk (beta of asset) with that of Kings bar. 6 marks (Total 9 marks) Question 7 Explanation for Kings Bars to raise 100 million without changing the present capital structure very much. 5 marks Question 8 Arguments for the acquisition solely with long-term debt. 7 marks What the firm should do with the excess cash flows, after dividends, if the acquisition is financed with debt? 3 3 marks The advantages and disadvantages of share repurchase instead of cash dividend payment. 10 marks (Total 20 marks)

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