Question
Company cost of capital Your task is to find the cost of capital (WACC) for a company. The company has two sources of capital available.
- Company cost of capital
Your task is to find the cost of capital (WACC) for a company. The company has two sources of capital available. The marginal tax rate for the company is 25%.
Common stock: the company has 150 000 shares outstanding with current market value equal to 50 euros. You may assume, that the current risk free interest rate is 1.5% and the companys beta is equal to 1.50. The markets are expected to provide 12% (e.g. Rm) a year in the near future.
Debt 1: The company has issued 2 000 coupon bonds with par value of 5 000 euros. These bonds carry 6% annual coupon rate but currently offer 4% yield to investors. The bonds will be redeemed exactly 6 years from now.
Debt 2: The company has also recently obtained secured financing from the bank. The current loan balance is 5.22 million euros and the annual interest charged by bank is 2.75%.
Questions:
- Estimate the capital structure weights for each source and required rate of return for each source when necessary.
- Find the cost of capital (WACC) for the company
- Please describe shortly how possible increase in the cost of capital could influence a company
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