Calculate the firm’s after tax cost of new debt and of common equity, assuming new equity comes only from reinvested cash flow ( assuming constant growth rate ) Fine the firm’s WACC, assuming no new common stock is sold.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
The following tabulation gives earnings per share figures for Exxon manufacturing during the preceding 10 years. The firm’s common stock, 140,000 shares outstanding, is now selling for Rs.50 a share, and the expected dividend for the coming year i.e. 2002 is 50 percent of EPS for the year. Investors expect past trends to continue, so g may be based on the historical earnings growth rate.
Year EPS
1992 Rs.2
1993 2.16
1994 2.33
1995 2.52
1996 2.72
1997 2.94
1998 3.18
1999 3.43
2000 3.70
2001 4.00
The current interest rate on new debt is 8 percent. The firm’s marginal tax rate is 40 percent. The firm’s market value capital structure, considered to be optimal, is as follows:
Debt Rs. 3,000,000
Common equity 7,000,000
- Calculate the firm’s after tax cost of new debt and of common equity, assuming new equity comes only from reinvested cash flow ( assuming constant growth rate )
Fine the firm’s WACC, assuming no new common stock is sold.
do not use excel
Find the WACC of Naveed Computers. The total book value of the firm’s equity is $12 million; book value per share is $22. The stocks sell for a price of $32 per share, and the
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