CAP plc is a listed company that owns and operates a large number
CAP plc is a listed company that owns and operates a large number of farms throughout the world. A variety of crops are grown. Financing structure The following is an extract from the balance sheet of CAP plc at 30 September 2002. Ordinary shares of £1 each £m 200 Reserves 100 9% irredeemable £1 preference shares 50 8% loan stock 2003 250 600 The ordinary shares were quoted at £3 per share ex div on 30 View complete question » CAP plc is a listed company that owns and operates a large number of farms throughout the world. A variety of crops are grown. Financing structure The following is an extract from the balance sheet of CAP plc at 30 September 2002. Ordinary shares of £1 each £m 200 Reserves 100 9% irredeemable £1 preference shares 50 8% loan stock 2003 250 600 The ordinary shares were quoted at £3 per share ex div on 30 September 2002. The beta of CAP plc’s equity shares is 0.8, the annual yield on treasury bills is 5%, and financial mar- kets expect an average annual return of 15% on the market index. The market price per preference share was £0.90 ex div on 30 September 2002. Loan stock interest is paid annually in arrears and is allowable for tax at a corporation tax rate of 30%. The loan stock was priced at £100.57 ex interest per £100 nominal on 30 September 2002. Loan stock is redeemable on 30 September 2003. Assume that taxation is payable at the end of the year in which taxable profits arise. A new project Difficult trading conditions in European farming have caused CAP plc to decide to convert a number of its farms in Southern Europe into camping sites with effect from the 2003 hol- iday season. Providing the necessary facilities for campers will require major investment, and this will be financed by a new issue of loan stock. The returns on the new camp- site business are likely to have a very low correlation with those of the existing farming business. Requirements Using the capital asset pricing model, calculate the required rate of return on equity of CAP plc at 30 September 2002. Ignore any impact from the new campsite project. Briefly explain the implications of a beta of less than 1, such as that for CAP plc. Calculate the weighted average cost of capital of CAP plc at 30 September 2002 (use your calculation in answer to requirement (a) above for the cost of equity). Ignore any impact from the new campsite project. Without further calculations, identify and explain the factors that may change CAP plc’s equity beta during the year ending 30 September 2003.
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