Debra Diacono, CFO of James Ltd a listed Australian company, has approached you for advice on how to estimate the company’s weighted average cost of capital. She supplies you with the following information to assist you with your calculations: 13-week Treasury note yield 3.00% p.a. , 10-year government bond rate 3.50% p.a. , Number of James Ltd shares on issue 10 million Current share price $45.60 Bond details: One thousand 6% fixed-rate bonds with a face value of $100,000 each initially issued with 10 years to expiry 4 years ago. Coupons are paid annually with one full year until the next coupon is paid 10-year bonds with the same credit rating are currently being issued with coupon rates = 5.5% p.a. 6-year bonds with the same credit rating are currently being issued with coupon rates = 4.5% p.a. Corporate tax rate 30%, Market risk premium 7% p.a., Standard deviation of returns on the ASX 200 25% p.a., Standard deviation of returns on James Ltd shares 30% p.a., Covariance between the returns on the ASX 200 and James Ltd shares 0.045 (a) Calculate the cost of equity capital for James Ltd. (b) Calculate the (after tax) cost of debt capital for James Ltd. (c) Calculate the after-tax weighted average cost of capital for James Ltd.
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Debra Diacono, CFO of James Ltd a listed Australian company, has approached you for advice on how to estimate the company’s weighted average cost of capital. She supplies you with the following information to assist you with your calculations:
13-week Treasury note yield 3.00% p.a. ,
10-year government bond rate 3.50% p.a. ,
Number of James Ltd shares on issue 10 million
Current share price $45.60
Bond details:
- One thousand 6% fixed-rate bonds with a face value of $100,000 each initially issued with 10 years to expiry 4 years ago. Coupons are paid annually with one full year until the next coupon is paid
- 10-year bonds with the same credit rating are currently being issued with coupon rates = 5.5% p.a.
- 6-year bonds with the same credit rating are currently being issued with coupon rates = 4.5% p.a.
Corporate tax rate 30%,
Market risk premium 7% p.a.,
Standard deviation of returns on the ASX 200 25% p.a.,
Standard deviation of returns on James Ltd shares 30% p.a.,
Covariance between the returns on the ASX 200 and James Ltd shares 0.045
(a) Calculate the
(b) Calculate the (after tax) cost of debt capital for James Ltd.
(c) Calculate the after-tax weighted average cost of capital for James Ltd.
(d) Provide a response to Debra about the suitability of using WACC in the setting she proposes.
You present your results to Debra who says “That’s fantastic that you’ve finally calculated this figure for us as we really need it to assess a new investment opportunity. Without giving too much away, it’s price-sensitive you know, we’re considering the acquisition of a large listed company in the US and we really need to know our cost of funds so that we can work out if this is positive
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