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Question 3: (Cost of Capital) - 12 marks A company is trying to work out the appropriate cost of capital to use in its capital
Question 3: (Cost of Capital) - 12 marks A company is trying to work out the appropriate cost of capital to use in its capital project evaluations. It has identified the following information about its current capital structure: Equity: R1 000 000 Long term debt: R250 000 o Note: these bonds were originally issued at a coupon rate of 15%. The yield to maturity (YTM) of these bonds is currently 10%. Short term debt: R100 000 o This is an overdraft facility with interest charged at the prime overdraft rate which is currently 16%. The current marginal corporate tax rate is 25%. The company's Beta is 1.2 and the estimated Market Risk Premium is 6%. The current long term Government Bond rate is 9% a. Calculate the company's Weighted Average Cost of Capital (WACC). b. Explain the relevance of the tax rate to the calculation
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