Question

1. Sao Paolo Foods is a Brazilian producer of breads and other baked goods. Over the past year, profitability has been strong and the share price has risen from R$15 per share to R$25 per share. The company has 20 million shares outstanding. The company’s borrowing is conservative; the company has only R$100 million in debt. The debt trades at a yield to maturity 50 basis points above Brazilian risk-free bonds. Sao Paolo Foods has a market beta of 0.7. If the Brazilian risk-free rate is 7 percent, the market risk premium is 5 percent, and the marginal tax rate is 30 percent, what is Sao Paolo’s cost of capital?

Answer 1

Solution starts by listing down the given information in the question, followed by the formula for cost of capital which depends on the capital structure of the firm (proportion of Debt and Equity).

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Outstan ding shaes - 2o mitlon Debt Campan R l00 million yield to motuet 3.5% werguted Av cost- NE WACC in Capital stouctime n Captal Structunc "Total ggust7= R425 X 20 million 500 million Total debt R$ 100 million W00 W 50o 60D SOD

khae Y, → yield on debt. 7.56-03) 5.25 구 + 3.5 ニ 10-5メ 500 x10.9s 600 .. Cost 600 0.875+8.75 ニ9.625%