Memoe Plc is a large firm with a market capitalisation of €3,560,000,000 (3.56 Billion). The firm has one billion ordinary shares issued.
The firm’s long-term debt consists of a single bond issue of 100 million bonds with a current market price of €92.60 per bond. These bonds are redeemable at par of €100 per bond in 5 years’ time. The coupon on these bonds is 6.86% paid annually. Corporate tax rate is 12.5%.
You have calculated the firm’s beta using historical data over a five-year period as 1.36. the risk-free rate of interest is 4.25% per annum, the returns on equity markets over the past five years average 7.3%.
Weight of equity = (3.56/3.56+9.26)=0.27
Weight of debt = (9.26/12.82)=0.73
Cost of equity = risk-free rate + (Beta x market risk premium)
4.25+(1.36*7.3)= 14.18%
WACC = [weight of debt x cost of debt x (1 - tax rate)] + (weight of equity x cost of equity)
=(0.73*6.86*0.875)+(0.27*14.18)
=4.38+3.83
= 8.21%
WACC represents the expense of raising one additional dollar of money. A WACC of 8.21% means the company must pay its investors an average of $0.0821 in return for every $1 in extra funding. It can definitely be realistic depending on other factors. But as weight of debt is significantly high, company is definitely at a considerable risk.
Share Price = 3.56 Billion/ 1 Billion = 3.56.
Memoe Plc is a large firm with a market capitalisation of €3,560,000,000 (3.56 Billion). The firm...
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