a. Calculate the market value weights for Carnival's capital structure. b. Calculate Carnival's cost of equity using the CAPM. c. Calculate Carnival's before-tax cost of debt
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.
Corporation (CCL) recently sold new bonds at discount price of $894.67. The bonds have a short 4-year maturity, have a coupon rate of 10.00%, and pay interest semi-annually. In addition to the $10.185 billion worth of bonds outstanding, Carnival also has $11.801 billion worth of common stock equity outstanding. According to Yahoo! Finance, Carnival's stock has a beta of 1.92. Currently, the expected return on the market portfolio and risk-free rate are, 5.30% and 0.65%, respectively.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 5 images
d. Calculate Carnival's current WACC using a 21% corporate tax rate.
by Bartleby Expert
