You are the newly-appointed financial manager of Bull Ltd which is a listed company. The managing director has asked you

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You are the newly-appointed financial manager of Bull Ltd which
is a listed
company. The managing director has asked you to assess whether
the
company’s ordinary shares are correctly priced at present and to
determine
the company’s cost of capital. Based on your enquiries, you
have
ascertained the following:
The company’s expected returns, and their subjective probabilities
assigned by leading
securities brokers in various market conditions, are set out
below:
1. The projected risk-free rate is 10% per annum for the
foreseeable future.
2. The company is in a tax-paying position, and its current tax
rate is 35%.
3. The company’s present capital structure, which is considered
optimal at
current market values, is as follows:
• 1 000 000 ordinary shares in issue. The current share price is
N$6.50
• 16% cumulative, redeemable preference shares at a total
carrying
amount of N$1 100 000. These shares are redeemable in five
years’
time at the carrying amount and similar preference shares are
trading at
an 18% yield per annum. The current dividend has just been paid
and
you are confident that future dividends will be paid at the end of
each
year until redemption.
• 12% irredeemable debentures at a total carrying amount of N$3 750
000.
The market interest rate for similar debentures is 15%.
Required
(a) Apply the capital asset pricing model (CAPM) to determine if
the
company’s ordinary shares are correctly priced at present. (8
marks)
(b)Determine the company’s current weighted average cost of
capital. (12 marks)
(c)Explain why investors are concerned with the systematic rather
than the total risk of
a share, and explain how systematic risk is measured. (5 marks)