Company A is unlisted and all-equity financed. It is trying to estimate its cost of equity.
The following information relates to another company, Company B, which operates in the same industry as Company A and has similar business risk:
Equity beta = 1.6
Debt:equity ratio 40:60
The rate of corporate income tax is 20%.
The expected premium on the market portfolio is 7% and the risk-free rate is 5%.
What is the estimated cost of equity for Company A?
Give your answer to one decimal place.
? %

• A.11.3, 12.30
• B.12.3, 12.30

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Company A operates in country A and uses currency AS. It is looking to acquire Company B which operates in country B and uses currency B$. The following information is relevant:

The assistant accountant at Company A has prepared the following valuation of company B's equity, however there are some errors in his calculations.

Value of Company B's equity = 14.16 + 16.03 + 17.67 = AS47.86 million
Company B has BS5 million of debt finance.
Which of the following THREE statements are true?

• A.The conversion into AS is incorrect as the assistant accountant should have divided by the exchange rate and not multiplied.
• B.The valuation is understated because forecast cash flows beyond year 3 have been ignored.
• C.The calculations show Company B's entity value, not its equity value.
• D.Cash flow to all investors should be discounted at Company B's cost of equity of 10% rather than its WACC of 8%.
• E.The forecast exchange rates are incorrect as they show the BS strengthening and it should be weakening.

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WX, an advertising agency, has just completed the all-cash acquisition of a competitor, YZ. This was seen by the market as a positive strategic move byWX.
Which THREE of the following will WX's shareholders expect the company's directors to prioritise following the acquisition?

• A.The regulatory approval required to complete the acquisition.
• B.The retention of YZ's key customers.
• C.The development of a dividend policy to meet the expectations of the YZ's shareholders.
• D.The realisation of anticipated post-acquisition synergies.
• E.The integration and retention of key employees of YZ.

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Select the most appropriate divided for each of the following statements:

Correct Answer:

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Listed Company A has prepared a valuation of an unlisted company. Company B. to achieve vertical integration Company A is intending to acquire a controlling interest in the equity of Company B and therefore wants to value only the equity of Company B.
The assistant accountant of Company A has prepared the following valuation of Company B's equity using the dividend valuation model (DVM):
Where:
* S2 million is Company B's most recent dividend
* 5% is Company B's average dividend growth rate over the last 5 years
* 10% is a cost of equity calculated using the capital asset pricing model (CAPM), based on the industry average beta factor

Which THREE of the following are valid criticisms of the valuation of Company B's equity prepared by the assistant accountant?

• A.The DVM calculation should use Company A's cost of equity rather than Company B's cost of equity
• B.It is better to use the present value of earnings rather than present value of dividends to value a controlling interest
• C.The beta factor used may not reflect Company B's financial risk.
• D.An unlisted company cannot use the capital asset pricing model to calculate its cost of equity
• E.The 5% growth rate may not reflect the future growth of Company B.

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