The company has 3 million shares with a market value of $100 each. The shares’ expected dividend yield is 3% pa and their total returns have a beta of 1.5. · The company is funded by $200 million worth of 5-year bonds priced at par which pay a fixed coupon of 4% pa. · The corporate tax rate is 30%. · Government bonds pay a fixed coupon rate of 2% pa and yield 3% pa. · The ASX200 market index has an expected dividend yield of 4% pa and an expected total return of 8% pa. All rates are effective annual rates. Assume a classical tax system. Question 1a: Calculate the company’s debt-to-assets ratio Question 1b: Calculate the company’s required return on equity (rE). Question 1c: Calculate the company’s after-tax WACC. Question 1d: Calculate the company’s levered b
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.
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