The equity beta of XYZ SE shares is estimated to be 0.8. The expectedequity market return is 8% per annum. The current risk free rate is 5% perannum. The company’s raises debt through issuing long term bonds.Currently XYZ has 3million £100 long term bonds outstanding with a 6.5%annual coupon. These bonds are currently trading at par (£100). Thecorporate tax rate is 24%. The market value of XYZ’s shares is currently£700m. Estimate XYZ’s Weighted Average Cost of Capital.
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.
The equity beta of XYZ SE shares is estimated to be 0.8. The expected
equity market return is 8% per annum. The current risk free rate is 5% per
annum. The company’s raises debt through issuing long term bonds.
Currently XYZ has 3million £100 long term bonds outstanding with a 6.5%
annual coupon. These bonds are currently trading at par (£100). The
corporate tax rate is 24%. The market value of XYZ’s shares is currently
£700m. Estimate XYZ’s Weighted Average Cost of Capital.
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