4) (10 points) Company ABX is analyzing a major expansion of its main line of business. The project will be financed on a debt-to-value ratio of 25%. Operating management has provided cash flow forecasts for the Project Z, but the treasurer must estimate the appropriate discount rates of each source of funds to determine its WACC. In this regard, the Chief Financial Officer has asked you to produce an estimate of the cost of equity, and has given you the information below. You are supposed to produce a clear presentation, showing your rationale for every component of your calculation. Capital Market Return Data Current Yields on Government Securities 3-Month T-Bills 1-Year Bonds 5-Year Bonds 10-Year Bonds 20-Year Bonds Annualized Yield to Maturity 1,31% 1,40% 2,07% 4,23% 4,46% Historic Average Total Annual Returns on Government Securities and Common Stocks (1980-2015) Average Annual Return Standard Deviation T-Bills Intermediate Bonds Long-term Bonds Large Company Stocks Small Company Stocks 5,2% 6,4% 6,0% 14,0% 17,8% 3,0% 6,6% 10,8% 16,8% 25,6% Historic Average Total Annual Returns on Government Securities and Common Stocks (1929-2015) Average Annual Standard Return Deviation T-Bills 3,8% 3,3% Intermediate Bonds 5,4% 5,8% Long-term Bonds 5,5% 9,2% Large Company Stocks 12,7% 20,3% Small Company Stocks 17,7% 34,1% Portfolio of Government bonds with maturity near 5 years. Portfolio of Government bonds with maturity near 20 years. 'Standard & Peer's 500 Stock Price Index. "A subset of small cap stocks traded on the NYSE Selected Data for Comparable Firms Debt/Value Be Market Values Book Values Comparable 1 Comparable 2 Comparable 3 0,10 0,05 0,35 0,30 0,10 0.50 2,5 2,3 3,4 4) (10 points) Company ABX is analyzing a major expansion of its main line of business. The project will be financed on a debt-to-value ratio of 25%. Operating management has provided cash flow forecasts for the Project Z, but the treasurer must estimate the appropriate discount rates of each source of funds to determine its WACC. In this regard, the Chief Financial Officer has asked you to produce an estimate of the cost of equity, and has given you the information below. You are supposed to produce a clear presentation, showing your rationale for every component of your calculation. Capital Market Return Data Current Yields on Government Securities 3-Month T-Bills 1-Year Bonds 5-Year Bonds 10-Year Bonds 20-Year Bonds Annualized Yield to Maturity 1,31% 1,40% 2,07% 4,23% 4,46% Historic Average Total Annual Returns on Government Securities and Common Stocks (1980-2015) Average Annual Return Standard Deviation T-Bills Intermediate Bonds Long-term Bonds Large Company Stocks Small Company Stocks 5,2% 6,4% 6,0% 14,0% 17,8% 3,0% 6,6% 10,8% 16,8% 25,6% Historic Average Total Annual Returns on Government Securities and Common Stocks (1929-2015) Average Annual Standard Return Deviation T-Bills 3,8% 3,3% Intermediate Bonds 5,4% 5,8% Long-term Bonds 5,5% 9,2% Large Company Stocks 12,7% 20,3% Small Company Stocks 17,7% 34,1% Portfolio of Government bonds with maturity near 5 years. Portfolio of Government bonds with maturity near 20 years. 'Standard & Peer's 500 Stock Price Index. "A subset of small cap stocks traded on the NYSE Selected Data for Comparable Firms Debt/Value Be Market Values Book Values Comparable 1 Comparable 2 Comparable 3 0,10 0,05 0,35 0,30 0,10 0.50 2,5 2,3 3,4
