Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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XYZ Banks Inc. is a short-term lender. XYZ is all equity financed. XYZ has 20 million shares outstanding which trade for P7 per share. XYZ's shareholders require a return of 9%.
Cash-Mart Financial is also a short-term lender. It's shares are trading for P15 per share. Cash-Mart has 10 million shares outstanding. Cash-Mart's corporate bonds are rated BB and are trading for 87.5% of face value to yield 7%. The face value of Cash-Mart's debt is P100 million.
What is the required return of Cash-Mart's shareholders? (Assume that the tax rate is 0%.)
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The Capital Structure consists of different sources of funds which mainly used for financing the projects of the business. Different capital structures have different weights and have different costs attached to them. Different firms choose to have different capital structures for their business as per the size and needs of the business of financing and considering all the relevant factors of the source which is being taken being the cost of borrowing and others.
Unlevered Cost of Equity refers to the one which shows the cost beared without taking debt in its capital structure or in other words the cost of having only equity in the capital structure.It can be calculated using the unlevered beta of the firm.
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