manufacturing firm will buy new equipment worth Php100 million. It will be used to produce a new line of products in the market. The company will use internally generated cash flows and borrow from a bank to acquire the equipment: 30 million pesos in cash and 70 million pesos in debt. Calculate the firm’s weighted average cost of capital given the following: Yield on government-issued bonds = 4% p.a. Market portfolio return = 11% p.a. Stock beta of similar listed manufacturing firms = 0.9 Loan interest rate, pre-tax = 9.5% p.a.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
A manufacturing firm will buy new equipment worth Php100 million. It will be used to produce a new line of products in the market. The company will use internally generated cash flows and borrow from a bank to acquire the equipment: 30 million pesos in cash and 70 million pesos in debt. Calculate the firm’s weighted average cost of capital given the following:
Yield on government-issued bonds = 4% p.a.
Market portfolio return = 11% p.a.
Stock beta of similar listed manufacturing firms = 0.9
Loan interest rate, pre-tax = 9.5% p.a.
Corporate income tax = 30%
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