U suford Use of a risk adjusted discount rate PROBLEMS Calculating cost of capitol (LO 1) BayofIslands Dairies lid has an interest rate on its debt of 6 per cent per annum. The systematic risk of its equity is 1.2 and the effective company tax rate is 0.12. Forly per cent of its funding is provided by debt, while 60 per cent is provided by equity. The risk-free interest rate is 5 per cent per annum. In calculating its cost of capital, Bay of Islands has obtained two expert opinions as to the market risk premium (including the franking premium). One expert suggests that the market risk premium is 1 per cent per annum, while the other suggests that the market risk premium is 5 per cent per annum. What is Bay of Islands' cost of capital based on these experts' opinions of the market risk premium NPV analysis to 21 Spares Lid manufactures car parts and management is considering an expansion of its existing operations at a cost of $600000. I expects this expansion to generate additional net cash inflows for the next 10 years as follows: $100000 per onnum in Years 1-5 and $130000 per annum In Years 6-10. The company's analys has made the following estimates: a) the systematic risk of the company's existing assets is 0.75 b) the risk free interest rate is 11 per cent per annum c) the expected rate of return on the market portfolio is 15 per cent per annum. Assuming that there is no company income tax, should the company undertake the expansion U suford Use of a risk adjusted discount rate PROBLEMS Calculating cost of capitol (LO 1) BayofIslands Dairies lid has an interest rate on its debt of 6 per cent per annum. The systematic risk of its equity is 1.2 and the effective company tax rate is 0.12. Forly per cent of its funding is provided by debt, while 60 per cent is provided by equity. The risk-free interest rate is 5 per cent per annum. In calculating its cost of capital, Bay of Islands has obtained two expert opinions as to the market risk premium (including the franking premium). One expert suggests that the market risk premium is 1 per cent per annum, while the other suggests that the market risk premium is 5 per cent per annum. What is Bay of Islands' cost of capital based on these experts' opinions of the market risk premium NPV analysis to 21 Spares Lid manufactures car parts and management is considering an expansion of its existing operations at a cost of $600000. I expects this expansion to generate additional net cash inflows for the next 10 years as follows: $100000 per onnum in Years 1-5 and $130000 per annum In Years 6-10. The company's analys has made the following estimates: a) the systematic risk of the company's existing assets is 0.75 b) the risk free interest rate is 11 per cent per annum c) the expected rate of return on the market portfolio is 15 per cent per annum. Assuming that there is no company income tax, should the company undertake the expansion
