Question
Novus can raise equity capital in its domestic equity market, or in the global equity markets. Novus's equity beta in the domestic market is 0.95.
Novus can raise equity capital in its domestic equity market, or in the global equity markets. Novus's equity beta in the domestic market is 0.95. In the global equity markets, which have a higher expected return, Novus has a lower beta of 0.625. The risk-free rate in either the domestic or global securities market is 3.5%, while the domestic market has an expected market return of 10% and the global market has an expected return of 12.5%.
a) Calculate Novus's cost of Equity for both portfolio data sets
Component (Symbol) | Domestic Portfolio | Global Portfolio |
Risk-free Rate (krf) | 3.5% | 3.5% |
Market return (km) | 10.0% | 12.5% |
Beta () | 0.950 | 0.625 |
Cost of equity (ke) |
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b) If Novus's debt/total capitalization ratio increases from 35% to 45%, given its cost of debt of 4% and its tax rate of 20%, calculate the WACC for each portfolio set before and after the change in capital structure.
Portfolio Set | 35% Debt WACC | 45% Debt WACC |
Domestic |
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Global |
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