1: Calculate Cost of Equity Using CAPM (Risk-free rate Beta (Market Rate of S& 500-Risk Free Rate)...
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Question:
- 1: Calculate Cost of Equity Using CAPM (Risk-free rate Beta (Market Rate of S& 500-Risk Free Rate) + Sovereign Spread (Difference in Government Bond Rates using the Sovereign Spread lumps together macro risks.)
- Step 2: Calculate the Cost of Debt Risk-Free Rate plus Project Spread (use the Project's theoretical Bond Rating based on the Interest Coverage Ratio)
- plus Sovereign Spread, All of these times (1-the corporate tax rate).
- Step 3: Apply Appropriate Capital Structures based on risk of project the more risk the more equity we want in our capital structure to get ar unadjusted WACC Step
- 4: Apply micro (Idiosyncratic) risk factors in some logical waySee Venerus/ AES methodology or use CLEAR premiums in the article to get an additional Nondiversifiable premium to get an adjusted WACC.
- Brazil Disney project
- USA Government Bond Rates: 4.23%
- Disney Beta: 1.30
- Market rate = 12%
- Brazil 10-year Bond Yield: 10.8%
- Sovereign spread= 2.47%
- project's theoretical bond rating = 4%
- corporate tax rate 15%
- high-risk equity 20% and debt 80%
- risk clear premiums 10.46%
Related Book For
Financial management theory and practice
ISBN: 978-1439078099
13th edition
Authors: Eugene F. Brigham and Michael C. Ehrhardt
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