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MC Question 23

Ring Co has in issue ordinary shares with a nominal value of $0·25 per share. These shares are traded on an efficient capital market. It is now 20X6 and the company has just paid a dividend of $0·450 per share. Recent dividends of the company are as follows:

Year 20X6 20X5 20X4 20X3 20X2
Dividend per share $0·450 $0·428 $0·408 $0·389 $0·370

Ring Co also has in issue loan notes which are redeemable in seven years’ time at their nominal value of $100 per loan note and which pay interest of 6% per year.

The finance director of Ring Co wishes to determine the value of the company.

Ring Co has a cost of equity of 10% per year and a before-tax cost of debt of 4% per year. The company pays corporation tax of 25% per year.

The finance director of Ring Co has been advised to calculate the net asset value (NAV) of the company.

Which of the following formulae calculates correctly the NAV of Ring Co?

A. Total assets less current liabilities
B. Non-current assets plus net current assets
C. Non-current assets plus current assets less total liabilities
D. Non-current assets less net current assets less non-current liabilities