COST OF CAPITAL ANALYSIS

i) To estimate the cost of equity for Seek Ltd, go to http://au.finance.yahoo.com and enter the ASX code for Seek Ltd: SEK.AX

Based on the information available on Yahoo! Finance, answer the following questions:

What is the most recent stock price?

How many shares are

Calculate the market value of equity or market capitalisation.

What is the beta for your company?

ii) Using the historical average market risk premium, what is the cost of equity for Seek Ltd using the Capital Asset Pricing Model (CAPM)? (Assume that the historical average market risk premium is 5.9%).

Go to www.bloomberg.com and find the Australian government bonds.

What are the yields on government bonds?1

Which of these yields should you use as input in calculating the cost of equity and why?

Using the historical market risk premium, calculate the cost of equity for your company using the

Capital Asset Pricing Model (CAPM)?

iii) You now need to calculate the cost of debt and the weighted average cost of capital (WACC) for Seek Ltd.

What is the cost of debt for Seek Ltd?

o You can calculate cost of debt as interest expense divided by book value of debt

o Is the figure you get reasonable? For example, is it close to the firms borrowing rate (weighted

average interest rate)?

o Briefly discuss possible reasons for any differences in the cost of debt you calculated and the

companys borrowing rate.

What is the WACC for Seek Ltd?

o Calculate WACC using book value of equity and also using market value of equity. o WhichofthetwoWACCswouldyouuseandwhy?