ExpertACCA · Question 22 · Estimating the Cost of Capital
Section B - Case 2: NeuroLink Prosthetics
Scenario: NeuroLink Prosthetics is a MedTech firm. It has 10 million ordinary shares in issue, currently trading at $4.50 per share. The company's equity beta is 1.2. The risk-free rate of return is 4% and the expected return on the market portfolio is 10%. NeuroLink also has $15 million (nominal value) of 6% redeemable bonds, currently trading at $95 per $100 nominal, redeemable at par in 5 years. The corporate tax rate is 25%.
Question: Which of the following cash flows should be used to calculate the after-tax cost of debt (Kd) for the redeemable bonds using the Internal Rate of Return (IRR) method?
Section B - Case 2: NeuroLink Prosthetics
Scenario: NeuroLink Prosthetics is a MedTech firm. It has 10 million ordinary shares in issue, currently trading at $4.50 per share. The company's equity beta is 1.2. The risk-free rate of return is 4% and the expected return on the market portfolio is 10%. NeuroLink also has $15 million (nominal value) of 6% redeemable bonds, currently trading at $95 per $100 nominal, redeemable at par in 5 years. The corporate tax rate is 25%.
Question: Which of the following cash flows should be used to calculate the after-tax cost of debt (Kd) for the redeemable bonds using the Internal Rate of Return (IRR) method?
Answer options:
Year 0: $(100.00), Years 1-5: $6.00, Year 5: $100.00
Year 0: $(95.00), Years 1-5: $6.00, Year 5: $100.00
Year 0: $(95.00), Years 1-5: $4.50, Year 5: $100.00
Year 0: $(95.00), Years 1-5: $4.50, Year 5: $95.00
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