5. Suppose the risk-free rate is 8 per cent, the market risk premium is 9 per cent...
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5. Suppose the risk-free rate is 8 per cent, the market risk premium is 9 per cent and the tax rate is 30 per cent. A firm has the following market values and beta based on the market data and the company's own analysis for various sources of financing. Source of Capital Market value Rcrore) Beta Ordinary share capital 800 1.45 Debentures 400 0.30 Public deposits 100 0.15 You are required to calculate () the required rate of return for each source of finance; (ii) the weighted average cost of capital; (iii) the asset beta; and (iv) the opportunity cost of capital on the firm's assets.
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