Question 1: Robotics, Inc., the company supplying Amazon's robotic labor to its fulfillment centers, has a...

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Question 1: Robotics, Inc., the company supplying Amazons robotic labor to its fulfillment centers, has a balance sheet that

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Answer 1

Answer #1

Solution:

Given,

Debt of Robotics Inc. (D) = $100m

Equity of Robotics Inc. (E) = $150m

Beta (B) = 2.75

Risk free rate (Rf) = 3%

Market Risk Premium (Rm) = 5%

Return on Equity (Re) = Rf + B x Rm

Re = 3 + 2.75 X 5

Re = 16.75

Yield to Maturity (YTM) = 6.5%

Tax (t) = 35%

Return on Debt (Rd) = YTM (1 - t)

Rd = 6.5 (1 - 0.35)

Rd = 4.225%

Weight of debt (Wd) = 25%

Weight of equity (We) = 75%

Cost of Capital (CoC) = We x Re + Wd + Rd

CoC = 0.75 X 16.75 + 0.25 x 4.225

CoC = 13.62%

Cost of capital = 13.62%

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Answer 2

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