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Corporate finance summative
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Corporate finance summative assignment
......c) Debt to equity and weighted average cost of capital
The return of the assets can be estimated with the aid of the CAPM, or the Capital Asset Pricing Model, according to which: the return on the asset = risk free rate + beta x (expected return on the market risk free rate) = 3.8 + 1.2 x (13 3.8) = 14.84
The weighted average cost of capital represents the total cost of capital for a firm, with the specification that each cost is proportionately included
Generally, the formula for WACC is: WACC = proportion of debt x cost of debt (1 corporate tax rate) + proportion of equity x cost of internal equity
The cost of internal equity = dividends per share / market value of share + growth rate of dividends (Investopedia) = 0.8 / 30 + 0.8 / 0.5 = 0.026 + 1.6 = 1.626
WACC 1, with 20% debt and 80% equity = 0.2 x 0.1 x (1 0.39) + 0.8 x 1.62 = 0.012 + 1.296 = 1.308
WACC 2, with 50% debt and 50% equity = 0.5 x 0.1 x (1 0.39) + 0.5 x 1.62 = 0.0305 +
or
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