What capital components are typically included when estimating a firm’s corporate cost of capital? Is the corporate cost of capital the same for all firms? Explain your answer.
The cost of capital is calculated as the weighted average of the costs of different components. The competence represent different sources of funds. Funds may be raised by way of debt, common stock and preference shares.
Cost of debt is calculated as the yield to maturity adjusted for tax savings. Cost of common stock can be calculated by CAPM or dividend discount model. Cost of preference shares may be calculated as annual dividend/price of shares. Each of these will vary from firm to firm. For instance, one firm may raise debt at a yield of 10% while other may raise debt at a yield of 15%. Similarly the cost of common stock may vary based on beta of the firm and/or expected dividend and market price. The cost of preference shares will also change depending upon the dividend rate at which it is issued.
What capital components are typically included when estimating a firm’s corporate cost of capital? Is the...
When estimating a firm's cost of capital, which of the following is NOT one of the four mistakes to avoid? A. Base the cost of debt on the coupon rate on a firm's existing debt. B. Never use the current book value capital structure to obtain the weights when estimating the WACC. C. Always remember that capital components are funds that come from investor. D. When estimating the market risk premium for the CAPM method, never use the historical average...
Corporate Financial Management:The Cost of Capital 12. a. Eve Industries has a target capital structure of 41% ordinary equity, 4% preference shares, and 55% debt. Its cost of equity is 19%, the cost of preference shares is 6.5%, and the pre-tax cost of debt is 7.5%. If the firm has a tax rate of 34%, what is the firm’s Weighted Average Cost of Capital (WACC)? (20%) Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar...
Which of the following statements is TRUE when estimating cost of capital? a) The cost of debt should be based on the coupon rate of current debt. b) The cost of equity capital should be based on the historical average cost of equity. c) Use either target capital structure weights or market value capital structure weights to estimate the WACC. d) All of the above are true.
Question text Estimating Components of both WACC and DDM Analysts estimate the cost of debt capital for Abbott Laboratories (NYSE: ABT) is 2.42% and that its cost of equity capital is 4.1%. Assume that ABT's marginal tax rate is 36%, the risk-free rate is 4.6%, the market risk premium is 5.0%, the ABT market price is $47.73 per common share, and its dividends are $1.09 per common share. (a) Compute ABT's average borrowing rate and its market beta. (Round your...
A levered firm’s cost of equity capital is 15%. The firm has a market value of equity of $15 million and $5 million in outstanding debt at an interest rate of 5%. The corporate tax rate is 35%. What is the firm’s WACC?
1.What is (WACC), why is it used? 2. Why the weighted average cost of capital (WACC) is used in capital budgeting? 3. Estimating the costs of different capital components—debt, preferred stock, retained earnings, and common stock? 4. How to combine the different component costs to determine the firm’s WACC? 5. Cost of Equity: CAPM, what is it used for?
Suppose you are estimating a growth rate of FCF within the corporate value model. You noticed that the firms FCF has been declining in the past three years while its NOPAT and operating capital have been steadily increasing over the same time period. 1) What could be the reason for the decline in FCFs, and 2) what can you say, in general, about the future FCF growth rate?
Divisional Costs of Capital A) A firm’s cost of capital is often a reflection of its activities and funding needs. Consider the case of Wizard Company, and answer the following questions: Wizard Co. currently has only a real estate division and uses only equity capital; however, it is considering creating consulting and distribution divisions. Its beta is currently 1.1. The risk-free rate is 4.8%, and the market-risk premium is 6.1%. This means that the firm’s real estate division will have...
When contrasting venture capital firms (VC) with private equity firms (PE), which of the following statements are true. I.) PE firms generally invest in companies with steady and predictable cash flow. II.) PE firms tend to invest in companies whose products are not yet proven in the market. III.) PE firms typically use leverage (debt capital) in a firm’s capital structure while VC firms typically fund purchases with equity. IV.) None of the above
Given the following information about your firm’s capital structure, calculate your firm’s WACC (assume the corporate tax rate is 35%). Debt Number of bonds outstanding = 14,000 price per bond = $1,165 par value per bond = $1,000 coupon rate = 6% (paid annually) Years to maturity = 10 Common Stock Number of shares outstanding = 1,000,000 Price per share = $25 Book value per share = $15 Beta = 1.4 Risk free rate = 4.5% Market risk premium =...