In: Finance
Debt – 7,000 6 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity selling for 106 percent of par; the bonds make semi-annual payments
Preferred shares – 15,000 shares paying a dividend of $3.65 per preferred shares outstanding currently selling at $72 per share
Common shares - 300,000 common shares outstanding, selling at $55 per share.
Corporate Tax Rate: 35%
Year |
Risk free rate (Rf) |
Return from the market (Rm) |
Beta |
2016 |
1.81 |
12.3 |
1.20 |
2015 |
1.75 |
15.5 |
1.5 |
2014 |
1.70 |
35.2 |
1.42 |
2013 |
1.80 |
(33.1) |
1.33 |
2012 |
1.92 |
9.83 |
1.4 |
2011 |
1.87 |
17.2 |
1.5 |
2010 |
1.88 |
24.1 |
1.45 |
2009 |
1.90 |
14.5 |
1.2 |
2008 |
1.85 |
(10.2) |
1.6 |
2007 |
1.77 |
8.3 |
1.25 |
- Calculate the average Risk free rate (Rf), Return from the market (Rm) and beta (β) from data collected in the last ten years in Table 1.
- Calculate the market value of each component of the capital structure of the company.
-Calculate the cost of debt, cost of preferred shares and cost of common shares. Note: Use CAPM for the cost of common shares using your averages for Rf, Rm and Beta
-Calculate the weighted average cost of capital
Please refer to below spreadsheet for calculation and answer. Cell reference also provided.
Cell reference -
Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.