Tammuz Enterprises, a public shareholding company, wants to calculate its weighted average cost of capital WACC. It has raised AED 1,000 million in capital (funds) distributed as follows: AED million 50 as preferred stock, AED 400 million as common stock and AED 550 million from debt (bonds). The firm has a marginal tax rate of 30 percent and it borrows at a coupon rate of 12 percent it pays to its bondholders. The price of its preferred stock is AED 80 and the dividend it pays to these stockholders is AED 6. The current flotation cost it would incur if it issued new preferred stock, is 2 percent. Furthermore, the firm’s stock beta coefficient is 0.95 and the risk-free return rate is 6 percent while the required market return rate is 13 percent. Using the above information, First, calculate the component cost of each source of capital and then calculate the WACC for the firm. Show you work step by step
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.
Tammuz Enterprises, a public shareholding company, wants to calculate its weighted average cost of capital WACC. It has raised AED 1,000 million in capital (funds) distributed as follows: AED million 50 as
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