CIMA F3 Exam With Confidence Using Practice Dumps

CAPM:

E(R)=Rf+β(Rm−Rf)E(R) = R_f + \beta (R_m - R_f)E(R)=Rf​+β(Rm​−Rf​)

Given:

E(R)=11%,Rf=2%,Rm=8%E(R) = 11\% , R_f = 2\%, R_m = 8\%E(R)=11%,Rf​=2%,Rm​=8%

0.11=0.02+β(0.08−0.02)⇒0.11−0.02=0.06β⇒0.09=0.06β⇒β=1.50.11 = 0.02 + \beta(0.08 - 0.02) \Rightarrow 0.11 - 0.02 = 0.06\beta \Rightarrow 0.09 = 0.06\beta \Rightarrow \beta = 1.50.11=0.02+β(0.08−0.02)⇒0.11−0.02=0.06β⇒0.09=0.06β⇒β=1.5

Beta > 1 ⇒ higher risk than the market.

Company A is identical in all operating and risk characteristics to Company B, but their capital structures differ.

Company B is all-equity financed. Its cost of equity is 17%.

Company A has a gearing ratio (debt:equity) of 1:2. Its pre-tax cost of debt is 7%. 

Company A and Company B both pay corporate income tax at 30%.

What is the cost of equity for Company A?

Company Z has identified four potential acquisition targets: companies A, B, C and D.

Company Z has a current equity market value of $590 million.

The price it would have to pay for the equity of each company is as follows:

Only one of the target companies can be acquired and the consideration will be paid in cash.

The following estimations of the new combined value of Company Z have been prepared for each acquisition before deduction of the cash consideration:

Ignoring any premium paid on acquisition, which acquisition should the directors pursue?