A company went public by issuing 500.000 shares of common stock at 10 TL per share. The shares are currently traded with a 40% premium. Current benchmark government bond rate is 8%, market return is 20% and the company has an unlevered beta coefficient of 0.26. At the beginning of the year, it issued 50,000 bonds of 1,000 TL par paying 10% coupon annually maturing in 20 years
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
A company went public by issuing 500.000 shares of common stock at 10 TL per share. The shares are currently traded with a 40% premium. Current benchmark government bond rate is 8%, market return is 20% and the company has an unlevered beta coefficient of 0.26. At the beginning of the year, it issued 50,000 bonds of 1,000 TL par paying 10% coupon annually maturing in 20 years. The yield to maturity is always 10,61%. The bonds are currently trading with 80 TL discount. The tax rate is 20%. What would be the WACC if you used book values of debt and equity?
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