Part (a, i) asked candidates to calculate an appropriate discount rate (cost of capital) that could be used to value the company and to explain why this could be similar to the ungeared cost of equity of a competitor. The calculation required candidates to recognise and use Modigliani and Miller’s proposition 2 with taxes (M&M2) formula.

Reponses to this part were varied, with many giving detailed explanations and using the correct method, and equally many others giving limited explanations and not recognising that M&M2 should have been used. Poorer explanations limited themselves to business risk similarity but not explaining how repaying the debt would eliminate financial risk and therefore an ungeared cost of equity was appropriate.

Errors in calculations involved the inability to use simple algebra to determine Keu even where the input factors were correct. And calculating a WACC after Keu was calculated, even though there would be no debt initially in the newly listed company.

Part (a, iv) asked candidates to discuss their results, including any assumptions made in obtaining the results, additional reasons for listing and why new shares maybe issued at a discount. Stronger answers did this part well and especially the reasons for listing and issuing new shares at a discount were covered well.

The answers explaining the assumptions were somewhat weaker, giving general but not scenario-specific assumptions. Few answers gave the range of possible share prices (with and without the project, with and without the discount), and therefore the discussion here was limited.

A sizeable number of candidates ignored or answered this part very superficially and therefore did not gain the majority of the 12 marks.. Candidates must ensure that all parts of all questions are answered in reasonable depth and commensurate to the marks allocated for that part.