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WUR) Question 2: (Total - 17 marks) a) Why is an estimate of the market risk premium useful in calculating a company's cost of capital?
WUR) Question 2: (Total - 17 marks) a) Why is an estimate of the market risk premium useful in calculating a company's cost of capital? How is this premium determined in practice? 2 marks b) Company XYZ has the following values: Cost of equity 16.5% Cost of debt 8.5% Cost of preference shares 13.0% Book value of equity $1,600,000 Book value of debt $600,000 Book value of preference shares $5,000,000 Market value of equity $2,310,000 Market value of debt $641,650 Market value of preference shares $5,000,000 Page 2 of 3 STUDENT ID NUMBER: Calculate: (a) The total book value and proportion of each of the sources of capital. 3 marks Th The total market value and proportion of each of the sources of capital. 3 marks Page 2 of 3 STUDENT ID NUMBER: Calculate: (a) The total book value and proportion of each of the sources of capital. 3 marks (b) The total market value and proportion of each of the sources of capital. 3 marks c) The company's weighted average cost of capital (WACC) based on the book value, assuming no taxes? 3.5 marks (d) The company's WACC based on the market value, assuming no taxes? 3.5 marks (e) Why there is a difference between the WACC calculated in (c) and the WACC calculated in (d)? Explain? 2 marks (Show all necessary calculations/ workings) Question 3: (Total = 16 marks) 121201 HOM 11
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