Oman Aluminium Company is trying to introduce an improved method of assessing investment projects using discounted cash flow techniques. For this it has to obtain a cost of capital to use as a discount rate. The finance department has assembled the following information: - The company has an equity beta of 2.10, which may be taken as the appropriate adjustment to the average risk premium. The yield on risk-free government securities is 6 per cent and the historic premium above the risk-free rate is estimated at 5.5 per cent for shares. - The market value of the firm’s equity is thrice the value of its debt. - The cost of borrowed money to the company is estimated at 9 per cent (before tax shield benefits). - Corporation tax is 35 per cent. Required: Estimate the equity cost of capital using CAPM. Calculate cost of debt after tax debt. Create an estimate of the weighted average cost of capital (WACC)
Oman Aluminium Company is trying to introduce an improved method of assessing investment projects using discounted cash flow techniques. For this it has to obtain a cost of capital to use as a discount rate. The finance department has assembled the following information: - The company has an equity beta of 2.10, which may be taken as the appropriate adjustment to the average risk premium. The yield on risk-free government securities is 6 per cent and the historic premium above the risk-free rate is estimated at 5.5 per cent for shares. - The market value of the firm’s equity is thrice the value of its debt. - The cost of borrowed money to the company is estimated at 9 per cent (before tax shield benefits). - Corporation tax is 35 per cent. Required: Estimate the equity cost of capital using CAPM. Calculate cost of debt after tax debt. Create an estimate of the weighted average cost of capital (WACC)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Oman Aluminium Company is trying to introduce an improved method of assessing investment
projects using discounted cash flow techniques. For this it has to obtain a cost of capital to use
as a discount rate. The finance department has assembled the following information:
- The company has an equity beta of 2.10, which may be taken as the appropriate
adjustment to the average risk premium. The yield on risk-free government securities is 6
per cent and the historic premium above the risk-free rate is estimated at 5.5 per cent for
shares.
- The market value of the firm’s equity is thrice the value of its debt.
- The cost of borrowed money to the company is estimated at 9 per cent (before tax shield
benefits).
- Corporation tax is 35 per cent.
Required:
- Estimate the equity cost of capital using
CAPM . - Calculate cost of debt after tax debt.
- Create an estimate of the weighted average cost of capital (WACC).
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