Capital Structure

Chapter 16 Capital Structure

1.       Objectives

1.1       Describe the traditional view of capital structure and its assumptions.
1.2       Describe the views of M&M on capital structure, both without and with corporate taxation, and their assumptions.
1.3       Identify a range of capital market imperfections and describe their impact on the views of M&M on capital structure.
1.4       Explain the relevance of pecking order theory to the selection of sources of finance.

2.      The Traditional View of Capital Structure

2.1	KEY POINT
	Under the traditional theory of cost of capital, the cost declines initially and then rises as gearing increases. The optimal capital structure will be the point at which WACC is lowest.

2.2       The traditional view of capital structure is that there is an optimal capital structure and the company can increase its total value by suitable use of debt finance in its capital structure.

2.3

ASSUMPTIONS

The assumptions on which this theory is based are as follows: (a)         The company pays out all its earnings as dividends. (b)         The gearing of the company can be changed immediately by issuing debt to repurchase shares, or by issuing shares to repurchase debt. There are no transaction costs for issues. (c)         The earnings of the company are expected to remain constant in perpetuity and all investors share the same expectations about these future earnings. (d)         Business risk is also constant, regardless of how the company invests its funds. (e)         Taxation, for the timing being, is ignored.

2.4       The traditional view is as follows:
(a)        As the level of gearing increases, the cost of debt remains unchanged up to a certain level of gearing. Beyond this level, the cost of debt will increase.
(b)        The cost of equity rises as the level of gearing increases and financial risk increases. There is a non-linear relationship between the cost of equity and gearing.
(c)        The WACC does not remain constant, but rather falls initially as the proportion of debt capital increases, and then begins to increase as the rising cost of equity (and possibly of debt) becomes more significant.
(d)        The optimum level of gearing is where the company’s WACC is minimized.
2.5       The traditional view about the cost of capital is illustrated in the following figure. It shows that the WACC will be minimized at a particular level of gearing X.

Where Ke is the cost of equity in the geared company
Kd is the cost of debt
K0 is the weighted average cost of capital
2.6       Conclusion – there is an optimal level of gearing – point X. At point X the overall return required by investors (debt and equity) is minimised. It follows that at this point the combined market value of the firm’s debt and equity securities will also be maximised.
2.7       Company should gear up until it reaches optimal point and then raise a mix of finance to maintain this level of gearing. However, there is no method, apart from trial and error, available to locate the optimal point.

3.       The Net Operating Income (Modigliani-Miller (M&M)) View of WACC

3.1	KEY POINT
	Modigliani and Miller stated that, in the absence of tax, a company’s capital structure would have no impact upon its WACC.

3.2       The net operating income approach takes a different view of the effect of gearing on WACC. In their 1958 theory, M&M proposed that the total market value of a company, in the absence of tax, will be determined only by two factors:
(a)        the total earnings of the company.
(b)        the level of operating (business) risk attached to those earnings.
3.3       The total market value would be computed by discounting the total earnings at a rate that is appropriate to the level of operating risk. This rate would represent the WACC of the company.
3.4       Thus M&M concluded that the capital structure of a company would have no effect on its overall value or WACC.

3.5

ASSUMPTIONS

M&M made various assumptions in arriving at this conclusion, including: (a)         A perfect capital market exists, in which investors have the same information, upon which they act rationally, to arrive at the same expectations about future earnings and risks. (b)         There are no tax or transaction costs. (c)         Debt is risk-free and freely available at the same cost to investors and companies alike.

3.6	KEY POINT
	If M&M theory holds, it implies: (a)         The cost of debt remains unchanged as the level of gearing increases. (b)         The cost of equity rises in such a way as to keep the WACC constant.

3.7       This would be represented on a graph as shown below.

3.8

EXAMPLE 1

A company has $5,000 of debt at 10% interest, and earns $5,000 a year before interest is paid. There are 2,250 issued shares, and the WACC is 20%. The market value of the company should be as follows: Earnings $5,000 WACC 0.2   $ Market value of the company ($5,000 ÷ 0.2) 25,000 Less: market value of debt (5,000) Market value of equity 20,000 The cost of equity is therefore And the market value per share is Suppose that the level of gearing is increased by issuing $5,000 more of debt at 10% interest to repurchase 562 shares (at a market value of $8.89 per share) leaving 1,688 shares in issue. The WACC will, according to the net operating income approach, remain unchanged at 20%. The market value of the company should still therefore be $25,000. Earnings $5,000 WACC 0.2   $ Market value of the company ($5,000 ÷ 0.2) 25,000 Less: market value of debt (10,000) Market value of equity 15,000 Annual dividends will now be $5,000 – $1,000 interest = $4,000. The cost of equity has risen to  and the market value per share is still: Conclusion: The level of gearing is a matter of indifference to an investor, because it does not affect the market value of the company, nor of an individual share. This is because as the level of gearing rises, so does the cost of equity in such a way as to keep both the weighted average cost of capital and the market value of the shares constant. Although, in our example, the dividend per share rises from $2 to $2.37, the increase in the cost of equity is such that the market value per share remains at $8.89.

4.      M&M with Tax

4.1       In 1963, M&M modified their model to reflect the fact that the corporate tax system gives tax relief on interest payments.
4.2       They admitted that tax relief on interest payments does lower the WACC. The savings arising from tax relief on debt interest are the tax shield (稅盾). They claimed that the WACC will continue to fall, up to gearing to 100%.
4.3       This suggests that companies should have a capital structure made up entirely of debt.

4.4       However, this does not happen in practice due to existence of other market imperfections (市場的不完善) which undermine the tax advantages of debt finance.

(A)      The problems of high gearing

4.5       Bankruptcy risk – As gearing increases so does the possibility of bankruptcy. If shareholders become concerned, this will increase the WACC of the company and reduce the share price.
4.6       Agency costs: restrictive conditions – In order to safeguard their investments, lenders/debentures holders often impose restrictive conditions in the loan agreements that constrain management’s freedom of action, e.g. restrictions:
(a)        on the level of dividends
(b)       on the level of additional debt that can be raised
(c)        on management from disposing of any major fixed assets without the debenture holders’ agreement.
4.7       Tax exhaustion – After a certain level of gearing, companies will discover that they have no tax liability left against which to offset interest charges.
Kd (1 – t) simply becomes Kd.
4.8       Borrowing/debt capacity – High levels of gearing are unusual because companies run out of suitable assets to offer as security against loans. Companies with assets which have an active second-hand market, and with low levels of depreciation such as property companies, have a high borrowing capacity.
4.9       Difference risk tolerance levels between shareholders and directors – Business failure can have a far greater impact on directors than on a well-diversified investor. It may be argued that directors have a natural tendency to be cautious about borrowing.
4.10     Restrictions in the articles of association may specify limits on the company’s ability to borrow.
4.11     The cost of borrowing increases as gearing increases.

5.      Pecking Order Theory (融資順位理論)

5.1       Pecking order theory has been developed as an alternative to traditional theory. It states that firms will prefer retained earnings to any other source of finance, and then will choose debt, and last of all equity. The order of preference will be:
(a)        Retained earnings
(b)       Straight debt
(c)        Convertible debt
(d)       Preference shares
(e)        Equity shares
5.2       Internally-generated funds – i.e. retained earnings
(a)        Already have the funds.
(b)       Do not have to spend any time persuading outside investors of the merits of the project.
(c)        No issue costs.
5.3       Debt
(a)        The degree of questioning and publicity associated with debt is usually significantly less than that associated with a share issue.
(b)       Moderate issue costs.
5.4       New issue of equity
(a)        Perception by stock markets that it is a possible sign of problems. Extensive questioning and publicity associated with a share issue.
(b)       Expensive issue costs.

(A)      Asymmetric information

5.5       Myers has suggested asymmetric information as an explanation for the heavy reliance on retentions. This may be a situation where managers, because of their access to more information about the firm, know that the value of the shares is greater than the current MV (based on the weak and semi-strong market information).
5.6       In the case of a new project, managers' forecasts may be higher and more realistic than that of the market. If new shares were issued in this situation, there is a possibility that they would be issued at too low a price, thus transferring wealth from existing shareholders to new shareholders. In these circumstances there might be a natural preference for internally-generated funds over new issues. If additional funds are required over and above internally-generated funds, then debt would be the next alternative.
5.7       If management is averse to making equity issues when in possession of favourable inside information, market participants might assume that management will be more likely to favour new issues when they are in possession of unfavourable inside information which leads to the suggestion that new issues might be regarded as a signal of bad news! Managers may therefore wish to rely primarily on internally-generated funds supplemented by borrowing, with issues of new equity as a last resort.
5.8       Myers and Majluf (1984) demonstrated that with asymmetric information, equity issues are interpreted by the market as bad news, since managers are only motivated to make equity issues when shares are overpriced. Bennett Stewart (1990) puts it differently: ‘Raising equity conveys doubt. Investors suspect that management is attempting to shore up the firm’s financial resources for rough times ahead by selling over-valued shares.’
5.9       Asquith and Mullins (1983) empirically observed that announcements of new equity issues are greeted by sharp declines in stock prices. Thus, equity issues are comparatively rare among large established companies.

5.10	Test your understanding 1
	Below is a series of graphs. Identify those that reflect: (a)        the traditional view of capital structure (b)        M&M without tax (c)        M&M with tax.

5.11

Test your understanding 2

Answer the following questions: A         If a company, in a perfect capital market with no taxes, incorporates increasing amounts of debt into its capital structure without changing its operating risk, what will the impact be on its WACC? B          According to M&M why will the cost of equity always rise as the company gears up? C          In a perfect capital market but with taxes, two companies are identical in all respects, apart from their levels of gearing. A has only equity finance, B has 50% debt finance. Which firm would M&M argue was worth more? D         In practice a firm which has exhausted retained earnings, is likely to select what form of finance next?

6.      CAPM and M&M Combined – Geared Betas

6.1	KEY POINT
	When an investment has differing business and finance risks from the existing business, geared betas may be used to obtain an appropriate required return. Geared betas are calculated by: (a)        Ungearing industry betas (b)        Converting ungeared betas back into a geared beta that reflects the company’s own gearing ratio

6.2       The gearing of a company will affect the risk of its equity. If a company is geared and its financial risk is therefore higher than the risk of an all-equity company, then the β value of the geared company’s equity will be higher than theβ value of a similar ungeared company’s equity.
6.3       The CAPM is consistent with the propositions of M&M. M&M argue that as gearing rises, the cost of equity rises to compensate shareholders for the extra financial risk of investing in a geared company. This financial risk is an aspect of systematic risk, and ought to be reflected in a company’s beta factor.

(A)      Geared betas and ungeared betas

6.4       The connection between M&M theory and the CAPM means that it is possible to establish a mathematical relationship between the β value of an ungeared company and theβ value of a similar, but geared, company. Theβ value of a geared company will be higher than theβ value of a company identical in every respect except that it is all-equity financed. This is because of the extra financial risk. The mathematical relationship between “ungeared” (or asset) and “geared” betas is as follows.

Where     is the asset or ungeared beta
 is the equity or geared beta
 is the beta factor of debt in the geared company
 is the market value of the debt capital in the geared company
 is the market value of the equity capital in the geared company
T is the rate of corporate tax
6.5       Debt is often assumed to be risk-free and its beta is then taken as zero, in which case the formula above reduces to the following form.

 or, without tax,

6.6

EXAMPLE 2

Two companies are identical in every respect except for their capital structure. Their market values are in equilibrium, as follows.   Geared Ungeared   $000 $000 Annual profit before interest and tax 1,000 1,000 Less: Interest (4,000 x 8%) 320 0   680 1,000 Less: Tax @30% 204 300 Profit after tax = dividends 476 700       Market value of equity 3,900 6,600 Market value of debt 4,180 0 Total market value of company 8,080 6,600 The total value of Geared is higher than the total value of Ungeared, which is consistent with M&M. All profits after tax are paid out as dividends, and so there is no dividend growth. The beta value of Ungeared has been calculated as 1.0. The debt capital of Geared can be regarded as risk-free. Calculate: (a)        The cost of equity in Geared. (b)        The market return Rm. (c)        The beta value of Geared. Solution: (a)        Since its market value (MV) is in equilibrium, the cost of equity in Geared can be calculated as: (b)        The beta value of Ungeared is 1.0, which means that the expected returns from Ungeared are exactly the same as the market returns, and Rm = 700/6,600 = 10.6% (c)        The beta of Geared, as we would expect, is higher than the beta of Ungeared.

(B)       Using the geared and ungeared beta formula to estimate a beta factor

6.7       Another way of estimating a beta factor for a company’s equity is to use data about the returns of other quoted companies which have similar operating characteristics: that is, to use the beta values of other companies’ equity to estimate a beta value for the company under consideration.
6.8       The beta values estimated for the firm under consideration must be adjusted to allow for differences in gearing from the firms whose equity beta values are known. The formula for geared and ungeared beta values can be applied.
6.9       If a company plans to invest in a project which involves diversification into a new business, the investment will involve a different level of systematic risk from that applying to the company’s existing business.
6.10     A discount rate should be calculated which is specific to the project, and which takes account of both the project’s systematic risk and the company’s gearing level. The discount rate can be found using the CAPM.
Step 1      Get an estimate of the systematic risk characteristics of the project’s operating cash flows by obtaining published beta values for companies in the industry into which the company is planning to diversify.
Step 2      Adjust these beta values to allow for the company’s capital gearing level. This adjustment is done in two stages.
(a)     Convert the beta values of other companies in the industry to ungeared betas, using the formula:

(b)     Having obtained an ungeared beta value , convert it back to geared beta , which reflects the company’s own gearing ratio, using the formula:

Step 3      Having estimated a project-specific geared beta, use the CAPM to estimate:
(a)     A project-specific cost of equity, and
(b)     A project-specific cost of capital, based on a weighting of this cost of equity and the cost of the company’s debt capital.

6.11

EXAMPLE 3

A company’s debt : equity ratio, by market values, is 2 : 5. The corporate debt, which is assumed to be risk-free, yields 11% before tax. The beta value of the company’s equity is currently 1.1. The average returns on stock market equity is 16%. The company is now proposing to invest in a project which would involve diversification into a new industry, and the following information is available about this industry. (a)        Average beta coefficient of equity capital = 1.59 (b)        Average debt : equity ratio in the industry = 1 : 2 (by market value) The rate of corporation tax is 30%. What would be a suitable cost of capital to apply to the project? Solution: Step 1    The beta value for the industry is 1.59. Step 2    (a)     Convert the geared beta value for the industry to an ungeared beta for the industry. (b)     Convert this ungeared industry beta back into a geared beta, which reflects the company’s own gearing level of 2 : 5. Step 3    (a)     This is a project-specific beta for the firm’s equity capital, and so using the CAPM, we can estimate the project-specific cost of equity as: Keg = 11% + (16% – 11%) x 1.51 = 18.55% (b)     The project will presumably be financed in a gearing ratio of 2 : 5 debt to equity, and so the project-specific cost of capital ought to be: [5/7 x 18.55%] + [2/7 x 70% x 11%] = 15.45%

6.12     Weaknesses in the formula
(a)        It is difficult to identify other firms with identical operating characteristics.
(b)       Estimates of beta values from share price information are not wholly accurate. They are based on statistical analysis of historical data, and as the previous example shows, estimates using one firm’s data will differ from estimates using another firm’s data.
(c)        There may be differences in beta values between firms caused by:
(i)        Different cost structures (e,g, the ratio of fixed costs to variable costs)
(ii)       Size differences between firms
(iii)      Debt capital not being risk-free
(d)       If the firm for which an equity beta is being estimated has opportunities for growth that are recognized by investors, and which will affect its equity beta, estimates of the equity beta based on other firm’s data will be inaccurate, because the opportunities for growth will not be allowed for.

6.13

Test your understanding 3

Backwoods is a major international company with its head office in the UK, wanting to raise $150 million to establish a new production plant in the eastern region of Germany. Backwoods evaluates its investments using NPV, but is not sure what cost of capital to use in the discounting process for this project evaluation. The company is also proposing to increase its equity finance in the near future for UK expansion, resulting overall in little change in the company’s market-weighted capital gearing. The summarized financial data for the company before expansion are shown below. Income statement for the year ended 31 December 2008   $m Revenue 1,984 Gross profit 432 Profit after tax 81 Dividends 37 Retained earnings 44     Balance sheet as at 31 December 2008   Non-current assets 846 Working capital 350   1,196 Medium term and long term loans (see note below) 210   986 Shareholders’ funds   Issued ordinary shares of $0.50 each nominal value 225 Reserves 761   986 Notes on borrowings These include $75m 14% fixed rate bonds due to mature in five years time and redeemable at par. The current market price of these bonds is $120.00 and they have an after-tax cost of debt of 9%. Other medium and long-term loans are floating rate UK bank loans at LIBOR plus 1%, with an after-tax cost of debt of 7%. Company rate of tax may be assumed to be at the rate of 30%. The company’s ordinary shares are currently trading at $3.76. The equity beta of Backwoods is estimated to be 1.18. The systematic risk of debt may be assumed to be zero. The risk free rate is 7.75% and market return 14.5%. The estimated equity beta of the main German competitor in the same industry as the new proposed plant in the eastern region Germany is 1.5, and the competitor’s capital gearing is 35% equity and 65% debt by book values, and 60% equity and 40% debt by market values. Required: Estimate the cost of capital that the company should use as the discount rate for its proposed investment in eastern company. State clearly any assumptions that you make.

Examination Style Questions

Question 1
Droxfol Co is a listed company that plans to spend $10m on expanding its existing business. It has been suggested that the money could be raised by issuing 9% loan notes redeemable in ten years’ time. Current financial information on Droxfol Co is as follows.

Income statement information for the last year

	$000
Profit before interest and tax	7,000
Interest	(500)
Profit before tax	6,500
Tax	(1,950)
Profit for the period	4,550
Statement of financial position for the last year	$000	$000
Non-current assets		20,000
Current assets		20,000
Total assets		40,000
Equity and liabilities
Ordinary shares, par value $1	5,000
Retained earnings	22,500
Total equity		27,500
10% loan notes	5,000
9% preference shares, par value $1	2,500
Total non-current liabilities		7,500
Current liabilities		5,000
Total equity and liabilities		40,000

The current ex div ordinary share price is $4.50 per share. An ordinary dividend of 35 cents per share has just been paid and dividends are expected to increase by 4% per year for the foreseeable future. The current ex div preference share price is 76.2 cents. The loan notes are secured on the existing non-current assets of Droxfol Co and are redeemable at par in eight years’ time. They have a current ex interest market price of $105 per $100 loan note. Droxfol Co pays tax on profits at an annual rate of 30%.

The expansion of business is expected to increase profit before interest and tax by 12% in the first year. Droxfol Co has no overdraft.

Average sector ratios:
Financial gearing: 45% (prior charge capital divided by equity capital on a book value basis)
Interest coverage ratio: 12 times

Required:

(a)     Calculate the current weighted average cost of capital of Droxfol Co.   (9 marks)
(b)     Discuss whether financial management theory suggests that Droxfol Co can reduce its weighted average cost of capital to a minimum level.                                                          (8 marks)
(c)     Evaluate and comment on the effects, after one year, of the loan note issue and the expansion of business on the following ratios:
(i)      interest coverage ratio;
(ii)     financial gearing;
(iii)    earnings per share.
Assume that the dividend growth rate of 4% is unchanged.                    (8 marks)
(Total 25 marks)
(ACCA F9 Financial Management Pilot Paper 2008 Q1)

Question 2
DD Co has a dividend payout ratio of 40% and has maintained this payout ratio for several years. The current dividend per share of the company is 50c per share and it expects that its next dividend per share, payable in one year’s time, will be 52c per share.

The capital structure of the company is as follows:

Bond A will be redeemed at par in ten years’ time and pays annual interest of 9%. The current ex interest market price of the bond is $95·08.

Bond B will be redeemed at par in four years’ time and pays annual interest of 8%. The cost of debt of this bond is 7·82% per year. The current ex interest market price of the bond is $102·01.

Bond A and Bond B were issued at the same time.

DD Co has an equity beta of 1·2. The risk-free rate of return is 4% per year and the average return on the market of 11% per year. Ignore taxation.

Required:

(a)     Calculate the cost of debt of Bond A.                                                      (3 marks)
(b)     Discuss the reasons why different bonds of the same company might have different costs of debt. (6 marks)
(c)     Calculate the following values for DD Co:
(i)      cost of equity, using the capital asset pricing model;                     (2 marks)
(ii)     ex dividend share price, using the dividend growth model;           (3 marks)
(iii)    capital gearing (debt divided by debt plus equity) using market values; and   (2 marks)
(iv)    market value weighted average cost of capital.                              (2 marks)
(d)     Discuss whether a change in dividend policy will affect the share price of DD Co. (7 marks)
(Total 25 marks)
(ACCA F9 Financial Management December 2009 Q2)

Question 3
Crastlee Inc is evaluating two projects. The first involves a $4.725 million expenditure on new machinery to expand the company’s existing operations in the textile industry. The second is a diversification into the packaging industry, and will cost $9.275 million.

Crastlee’s summarized balance sheet (statement of financial position) as at 31 December 2008, and those of Canall Inc and Sealalot plc, two quoted companies in the packaging industry, are shown below:

	Crestlee	Canall	Sealalot
	$m	$m	$m
Non-current assets	96	42	76
Current assets	95	82	65
	191	124	141
Ordinary shares1	15	10	30
Reserves	50	27	50
Medium and long-term loans2	56	15	13
Current liabilities	70	72	48
Total equity and liabilities	191	124	141
Ordinary share price (cents)	380	180	230
Loan stock price ($)	104	112	-
Equity beta	1.2	1.3	1.2

1       Crestlee and Sealalot 50 cents per value, Canall 25 cents per value.
2       Crestlee 12% loan stock 2012-2014, Canall 14% loan stock 2017, Sealalot medium-term bank loan.

Crestlee proposes to finance the expansion of textile operations with a $4.725 million 11% loan stock issue, and the packaging investment with a $9.275 million rights issue at a discount of 10% on the current market price. Issue costs may be ignored.

Crestlee’s managers are proposing to use a discount rate of 15% per year to evaluate each of these projects.

The risk free of interest is estimated to be 6% per year and the market return 14% per year. Corporate tax is at a rate of 33% per year.
Required:

(a)     Determine whether 15% per year is an appropriate discount rate to use for each of these projects. Explain your answer and state clearly any assumptions that you make.             (19 marks)
(b)     Crestlee’s marketing director suggests that it is incorrect to use the same discount rate each year for the investment in packaging as the early stages of the investment are more risky, and should be discount at a higher rate. Another board member disagrees saying that more distant cash flows are riskier and should be discounted at a higher rate. Discuss the validity of the views of each of the directors.     (6 marks)
(Total 25 marks)

Question 4
The managing director of Wemere, a medium-sized private company, wishes to improve the company’s investment decision-making process by using the discounted cash flow techniques. He is disappointed to learn that estimates of a company’s cost of capital usually require information on share prices which, for a private company, are not available. His deputy suggests that the cost of equity can be estimated by using data for Folten Inc, a similar sized, quoted company in the same industry, and he has produced two suggested discount rates for use in Wemere’s future investment appraisal. Both of these estimates are in excess of 15% per year which the managing director believes to be very high, especially as the company has just agreed a fixed rate bank loan at 10% per year to finance a small expansion of existing operations. He has checked the calculations, which are numerically correct, but wonders if there are any errors of principle.

Estimate 1: capital asset pricing model
Data have been purchased from a leading business school:

Equity beta of Folten	1.4
Market return	14%
Treasury bill yield	6%

The cost of capital is 14% + (14% – 6%) x 1.4 = 25.2%

This rate must be adjusted to include inflation at the current level of 4%. The recommended discount rate is 29.2%

Estimate 2: dividend valuation model

	Average share price (cents)	Dividend per share (cents)
2003	193	9.23
2004	109	10.06
2005	96	10.97
2006	116	11.95
2007	130	13.03

The cost of capital is
Where D1 = expected dividend
P0 = current market price
g = growth rate of dividend (%)
When inflation is included the discount rate is 15.01%

Other financial information on the two companies is presented below:

	Wemere	Folten
	$000	$000
Non-current assets	7,200	7,600
Current assets	7,600	7,800
Total assets	14,800	15,400
Ordinary shares (25 cents)	2,000	1,800
Reserves	6,500	5,500
Term loans	2,400	4,400
Current liabilities	3,900	3,700
	14,800	15,400

Notes:
(1)     The current ex-div share price of Folten Inc is 138 cents.
(2)     Wemere’s board of directors has recently rejected a take-over bid of $10.6 million.
(3)     Corporate tax is at the rate of 33%.

Required:

(a)     Explain any errors of principle that have been made in the two estimates of the cost of capital and produce revised estimates using both of the methods. State clearly any assumptions that you make. (14 marks)
(b)     Discuss which of your revised estimates Wemere should use as the discount rate for capital investment appraisal.                                                                                                   (4 marks)
(c)     Discuss whether discounted cash flow techniques including discounted payback are useful to small unlisted companies.                                                                                  (7 marks)
(Total 25 marks)