Kappa Company is fully equity financed and has a cost of capital (WACC) = 11% per annum and is evaluating following projects: Project Name Beta Expected Return (%) W 0.27 22% X 0.35 10,2% Y 1.3 12,7% Z 2.7 24% Rate of return on Central Bank Bond is 9% per annum and expected market return is 14% per annum. a) Which projects have an expected return higher than cost of capital (WACC) Kappa of 11%? b) Which projects should be accepted? c) Which projects would be incorrectly accepted or rejected if company's total cost of capital were used as minimum acceptable rate of return?
Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
COURSE: FINANCE LEVEL 2
Kappa Company is fully equity financed and has a cost of capital (WACC) = 11% per annum and is evaluating following projects:
|
Project Name |
Beta |
Expected Return (%) |
|
W |
0.27 |
22% |
|
X |
0.35 |
10,2% |
|
Y |
1.3 |
12,7% |
|
Z |
2.7 |
24% |
a) Which projects have an expected return higher than cost of capital (WACC) Kappa of 11%?
b) Which projects should be accepted?
c) Which projects would be incorrectly accepted or rejected if company's total cost of capital were used as minimum acceptable rate of return?
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