20 Jan Average Weighted Cost,
Week 4: Assignment
Capital budgeting involves decisions about whether or not to invest in fixed assets, and has a great influence on the performance and future value of companies. The discounted cash flow analysis is used in capital budgeting, and a key element of this procedure is the discount rate used in the analysis. Capital must be raised to finance fixed assets, and this capital comes from different types of debt, preferential shares and common shares. Each of these capital components has a cost, and these types of expenses, along with the proportions of each, are used to calculate the weighted average cost of capital of the company, CPPC (WACC).
A: Define:
1. What is meant by the capital structure of a company?
2. How is the cost of the capital structure calculated?
3. How is the cost of capital or cost of equity of a company calculated?
4. What is the CAPM model and how is it related to the cost of corporate equity?
B: Exercises
Exercise 1: Suppose that the risk free rate is 6% and that the expected market yield is 13%. What will be the required rate of an action whose beta is 0.7?
Risk-free rate (RF) 6%
Expected Market Performance (ERM) 13%
BETA 0.7
Exercise 2: Calculate the WACC – Weighted Average Cost, for its acronym in English, of the company Soya according to the following information:
Capital structure: 60% liabilities, 40% of Capital
Cost of liabilities: 7.5%
Tax rate: 35%
Risk-free rate: 2.6%
Beta of the company: 0.85
Market rates: 8.0%
Exercise 3: Calculate the WACC-
Average Weighted Cost, for its acronym in English, Croydon company according to the following information:
Capital structure: 55% liabilities, 45% of Capital
Cost of liabilities: 12.5%
Tax rate: 40%
Risk-free rate: 4.5%
Beta of the company: 0.65
Market rates: 9.0%
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