a. If the Treasury bill rate is 3% and the market risk premium is estimated at 7%., what is ABC’s cost of equity capital? b. What is the WACC? c. ABC Corp plans to expand the current operations. If the project will pay a cash flow of 10,000 next year and then cash flows growing at a rate of 4% over the next 3 years (for a total of 4 of cash flows), what is the most ABC is willing to spend on the initial investment for this project?
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.
ABC Corp has 20,000 shares of bonds outstanding with a coupon rate of 6%, face value of $1,000, and 30 years to maturity. The bonds are selling for 110 percent of par and make semiannual payments. The company also has 600,000 shares outstanding of common stock selling for $67 per share. The beta of the stock is 1.29 and the tax rate is 21%. a. If the Treasury bill rate is 3% and the market risk premium is estimated at 7%., what is ABC’s
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