CIMA Exam CIMAPRA19-F03-1 Topic 6 Question 80 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam

Question #: 80
Topic #: 6

Company WWW is identical in all operating and risk characteristics to Company ZZZ. but their capital structures differ. Company WWW and Company ZZZ both pay corporate income tax at 20%

Company WWW has a gearing ratio (debt: equity) of 1:3 Its pre-tax cost of debt is 6%.

Company ZZZ Is all-equity financed. Its cost of equity is 15%

What is the cost of equity tor Company WWW?

A17.0%

B18.0%

C17.4%

D17.7%

Show Suggested Answer

Suggested Answer: A

by Bette at Feb 13, 2024, 01:09 PM

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Jettie

6 months ago

I think we need to consider the gearing ratio and pre-tax cost of debt to determine the cost of equity for Company WWW.

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Donte

6 months ago

I see what you mean, Sherrell. The cost of equity for Company WWW depends on its own characteristics and capital structure.

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Sherrell

7 months ago

That's a good point, Jettie. The cost of equity for Company ZZZ is not relevant to the calculation for Company WWW.

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Jettie

7 months ago

I'm not sure, but I think the cost of equity for Company WWW is 17.4% because it is all-equity financed.

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Donte

7 months ago

I disagree, I believe the cost of equity for Company WWW is 18.0% because its pre-tax cost of debt is 6%.

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Sherrell

7 months ago

I think the cost of equity for Company WWW is 17.7% because it has a gearing ratio and pays corporate income tax.

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