Daleel plc is trying to introduce an improved method of assessing investment projects using discounted cash flow techniques. For this it has to obtain a cost of capital to use as a discount rate. The finance department has assembled the following information: – The company has an equity beta of 0.80, which may be taken as the appropriate adjustment to the average risk premium. The yield on risk-free government securities is 6.5 per cent and the historic premium above the risk-free rate is estimated at 5 per cent for shares. – The market value of the firm’s debt is thrice the value of its equity. – The cost of borrowed money to the company is estimated at 12 per cent (before tax shield benefits). – Corporation tax is 35 per cent. Assume: No inflation. Create an estimate of the weighted average cost of capital (WACC).

Daleel plc is trying to introduce an improved method of assessing investment projects using discounted cash flow techniques. For this it has to obtain a cost of capital to use as a discount rate. The finance department has assembled the following information: – The company has an equity beta of 0.80, which may be taken as the appropriate adjustment to the average risk premium. The yield on risk-free government securities is 6.5 per cent and the historic premium above the risk-free rate is estimated at 5 per cent for shares. – The market value of the firm’s debt is thrice the value of its equity. – The cost of borrowed money to the company is estimated at 12 per cent (before tax shield benefits). – Corporation tax is 35 per cent. Assume: No inflation. Create an estimate of the weighted average cost of capital (WACC).

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 6P

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. Oman Aluminium Company is trying to introduce an improved method of assessing investment projects using discounted cash flow techniques. For this it has to obtain a cost of capital to use as a discount rate. The finance department has assembled the following information: - The company has an equity beta of 2.10, which may be taken as the appropriate adjustment to the average risk premium. The yield on risk-free government securities is 6 per cent and the historic premium above the risk-free rate is estimated at 5.5 per cent for shares. The market value of the firm's equity is thrice the value of its debt. The cost of borrowed money to the company is estimated at 9 per cent (before tax shield benefits). - Corporation tax is 35 per cent. Required: a. Estimate the equity cost of capital using CAPM. jo debf,) hat per E.) b. Calculate cost of debt after tax debt. d. c. Create an estimate of the weighted average cost of capital (WACC).
Oman Aluminium Company is trying to introduce an improved method of assessing investment projects using discounted cash flow techniques. For this it has to obtain a cost of capital to use as a discount rate. The finance department has assembled the following information: - The company has an equity beta of 2.10, which may be taken as the appropriate adjustment to the average risk premium. The yield on risk-free government securities is 6 per cent and the historic premium above the risk-free rate is estimated at 5.5 per cent for shares. The market value of the firm's equity is thrice the value of its debt. The cost of borrowed money to the company is estimated at 9 per cent (before tax shield benefits). Corporation tax is 35 per cent. Required: a. Estimate the equity cost of capital using CAPM. b. Calculate cost of debt after tax debt. c. Create an estimate of the weighted average cost of capital (WACC).
Oman Aluminium Company is trying to introduce an improved method of assessing investment projects using discounted cash flow techniques. For this it has to obtain a cost of capital to use as a discount rate. The finance department has assembled the following information: - The company has an equity beta of 2.10, which may be taken as the appropriate adjustment to the average risk premium. The yield on risk-free government securities is 6 per cent and the historic premium above the risk-free rate is estimated at 5.5 per cent for shares. - The market value of the firm’s equity is thrice the value of its debt. - The cost of borrowed money to the company is estimated at 9 per cent (before tax shield benefits). - Corporation tax is 35 per cent. Required: Estimate the equity cost of capital using CAPM. Calculate cost of debt after tax debt. Create an estimate of the weighted average cost of capital (WACC).
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