You are helping XYZ — a 100°/0 equity financed diversified industrial group - on the required rate of return it should be using to evaluate the performance of its various business divisions. XYZ has three divisions — Ceramics, Sanitary equipment, and Solar panels — with similar asset base. The beta values of (the listed firms comparable to) each division are as follows: • Ceramics 2.0 • Sanitary equipment 1.2 • Solar panels 2.5 (a) Estimate the cost of equity for the firm and for each division assuming a risk free rate of 10% and market risk premium of 6%. (b) The capital budgeting department uses XYZ's composite beta to fix the required rate of return on projects proposed by any division. How might this standard distort capital allocation decisions across different divisions?
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
You are helping XYZ — a 100°/0 equity financed diversified industrial group - on the required
• Ceramics 2.0 • Sanitary equipment 1.2 • Solar panels 2.5
(a) Estimate the
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