Question
Use the following information to calculate the cost of capital for LOL Plc, on the assumption that investors can remove all unsystematic risk by diversification.
Use the following information to calculate the cost of capital for LOL Plc, on the assumption that investors can remove all unsystematic risk by diversification.
The systematic risk of LOL Plc's equity is 0.80;
The risk free rate is 10%;
The expected rate of return on the market portfolio is 15%;
The sources of funds used by LOL Plc and their respective market values are as follows:
Source of Funds | Market Value ($m) |
Debt (par value $100) | 1 |
Equity | 3 |
The interest rate on the debt is 11% paid annually. The debt, which is due to mature in eight years' time, has a current market price of $111.
The company tax rate is 30%.
After tax cost of equity = 14%
WACC = 12.08%
Required: Under what assumptions is the cost of capital you have calculated for LOL Plc in (a) appropriate for a proposed project?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started