The company has equity of € 35,000 and interest-bearing debt of € 15,000. The interest premium on the company's new loans (ie the interest margin) is 0.5%, the risk-free interest rate is 4.5%, and the general market risk premium is 4%. The beta calculated from the financial statements describing the company's risk is 0.8, taxes are not taken into account. Please indicate your answer to two decimal places. a) Calculate the average cost of capital for a company, WACC? b) The company decides to change its capital structure by taking out a new loan of EUR 20 000. What is the return on equity requirement with a changed capital structure?

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
icon
Related questions
Question

The company has equity of € 35,000 and interest-bearing debt of € 15,000. The interest premium on the company's new loans (ie the interest margin) is 0.5%, the risk-free interest rate is 4.5%, and the general market risk premium is 4%.

The beta calculated from the financial statements describing the company's risk is 0.8, taxes are not taken into account.

Please indicate your answer to two decimal places.

a) Calculate the average cost of capital for a company, WACC?

b) The company decides to change its capital structure by taking out a new loan of EUR 20 000. What is the return on equity requirement with a changed capital structure?

Expert Solution
steps

Step by step

Solved in 3 steps

Blurred answer
Knowledge Booster
Trading
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education