PT. BFI, currently has a capital structure of 20% debt and 80% equity. BFI's debt is in the form of bonds with a yield (coupon) of 8%. The risk-free income rate (Rf) is 5%, and the risk premium (Rm- Rf) is 6%. Using the CAPM, BFI estimates the current cost of equity at 12.50%. The tax rate imposed on PT BFI is 40%. With the information above, answer the questions below. a. How big is BFl's WACC currently? b. What is the current beta of BFI's common stock? c. What would be the beta of BFI if the company had no debt? d. BFI's finance staff is considering changing its capital structure to 40% debt and 60% equity, with this policy the bond yield will increase to 9.50%. The change in capital structure does not change the level of tax that must be paid (still 40%). With the planned change in capital structure, how much will the new BFI cost of equity? e. According to the data in (d), what is the WACC?
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.
Step by step
Solved in 4 steps with 2 images
