Question 1

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%.

Assume the cost of equity (Ke) is 11.2% and the after-tax cost of debt (Kd) is 5.7%.

Question: What is NeuroLink's Weighted Average Cost of Capital (WACC) based on market values?

Accepted Answer

First, calculate the total market value of equity (Shares * Price) and debt (Nominal / 100 * Market Price). Then apply the WACC formula: [Ve / (Ve + Vd)] * Ke + [Vd / (Ve + Vd)] * Kd.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Using the nominal value of debt ($15m) instead of the market value ($14.25m) for the weightings.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 6

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