Question

Using information below, calculate the "domestic" cost of equity for AK Corporation:              U.S....

Using information below, calculate the "domestic" cost of equity for AK Corporation:      
      
U.S. Treasury Yield   3.24%  
Average Return of the U.S. Stock Market   9.40%  
Average Return of the Global Stock Market   10.79%  
Beta Coefficient of AKC vs S&P 500   0.84  
Beta Coefficient of AKC vs Global Stock Market   1.02  
The Yield on Composite of Global Risk-Free Assets   2.79%  
      
      
Using information below, calculate the "global" cost of equity for AK Corporation:     
      
U.S. Treasury Yield   3.24%  
Average Return of the U.S. Stock Market   9.40%  
Average Return of the Global Stock Market   10.49%  
Beta Coefficient of AKC vs S&P 500   0.84  
Beta Coefficient of AKC vs Global Stock Market   1.02  
The Yield on Composite of Global Risk-Free Assets   2.79%  
      
      
Using information below, calculate the cost of debt for AK Corp:      
      
Average Yield to Maturity on Outstanding Debt   8.25%  
Effective Tax Rate   32.15%  
      
      
      
Using information below, calculate the weighted average cost of capital      
for AKC's global operations:     

      
AKC Cost of Debt   6.10%  
AKC Cost of "Domestic" Equity   9.31%  
AKC Cost of "Global" Equity   12.14%  
Value of Outstanding Equity (in Millions)   11,461 €  
Value of Outstanding Debt (in Millions)   4,584 €  

Homework Answers

Answer #1

cost of equity = risk free rate + (beta * (average market return - risk free rate))

domestic cost of equity = 3.24% + (0.84 * (9.40% - 3.24%)) = 8.4144%

global cost of equity = 2.79% + (1.02 * (10.49% - 2.79%)) = 10.644%

cost of debt = YTM * (1 - tax rate)

cost of debt = 8.25% * (1 - 32.15%) = 5.597625%

WACC = (weight of debt * cost of debt) + (weight of equity * cost of equity)

weight of debt = value of debt / (value of debt + value of equity)

weight of equity = value of debt / (value of debt + value of equity)

weight of debt = 4,584 / (4,584 + 11,461) = (4,584 / 16,045)

weight of equity = 11,461 / (4,584 + 11,461) = (11,461 / 16,045)

WACC = ((4,584 / 16,045) * 6.10%) + ((11,461 / 16,045) * 12.14%)

WACC = 10.4144%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Ganado's Cost of Capital.  Maria​ Gonzalez, Ganado's Chief Financial​ Officer, estimates the​ risk-free rate to be...
Ganado's Cost of Capital.  Maria​ Gonzalez, Ganado's Chief Financial​ Officer, estimates the​ risk-free rate to be 3.40 %​, the​ company's credit risk premium is 4.20​%, the domestic beta is estimated at 1.12​, the international beta is estimated at 0.88​, and the​ company's capital structure is now 25​% debt. The expected rate of return on the market portfolio held by a​ well-diversified domestic investor is 9.60​% and the expected return on a larger globally integrated equity market portfolio is 8.60 %....
Ganado's Cost of Capital. Maria Gonzalez, Ganado's Chief Financial Officer, estimates the risk-free rate to be...
Ganado's Cost of Capital. Maria Gonzalez, Ganado's Chief Financial Officer, estimates the risk-free rate to be 3.30%, the company's credit risk premium is 4.50%, the domestic beta is estimated at 1.19, the international beta is estimated at 0.91, and the company's capital structure is now 75% debt.The expected rate of return on the market portfolio held by a well-diversified domestic investor is 8.90%, and the expected return on a larger globally integrated equity market portfolio is 7.90%. The before-tax cost...
Lexington Corporation has a cost of debt of 7.2%, a cost of equity of 14.6%, and...
Lexington Corporation has a cost of debt of 7.2%, a cost of equity of 14.6%, and a cost of preferred stock of 9.4%. The company has 285,000 shares of common stock outstanding at a market price of $50 a share. There are 15,000 shares of preferred stock outstanding at a market price of $40 a share. The bond issue has a total face value of $16,000,000 and sells at 101% of face value. The tax rate is 25%. What is...
Carlson Corporation finances its capital needs with 20% long term debt and 80% equity. Carlson’s outstanding...
Carlson Corporation finances its capital needs with 20% long term debt and 80% equity. Carlson’s outstanding debt carries a coupon rate of 8.5%, and as of now has a yield to maturity of 6%. By comparison, the yield to maturity on short term U.S. Treasury Bills is currently 3.5%. The beta coefficient for Carlson Corporation’s equity was recently estimated to be 0.6. Historically, returns on short term treasuries have averaged 4.5% per year.    The expected return on the overall market...
Calculate the following: The cost of equity if the risk-free rate is 2%, the market risk...
Calculate the following: The cost of equity if the risk-free rate is 2%, the market risk premium is 8%, and the beta for the company is 1.3. The cost of equity if the company paid a dividend of $2 last year and is expected to grow at a constant rate of 7%. The stock price is currently $40. The weighted average cost of capital (WACC) if the company has a total value of $1 million with a market value of...
Use the following information to calculate the firm’s weighted average cost of capital: The dividend for...
Use the following information to calculate the firm’s weighted average cost of capital: The dividend for preferred shares is $5, and the current price for preferred stock is $75. The rate of return on long-term debt is 6%, the rate of return on short-term debt is 5%, and the marginal tax rate is 35%. The market risk premium is 5%, the risk-free rate is 3%, and the firm has a beta of 0.9. The firm’s capital structure is as follows:...
Information on Gerken Power Co., is shown below. Assume the company’s tax rate is 34 percent....
Information on Gerken Power Co., is shown below. Assume the company’s tax rate is 34 percent. Debt: 9,600 9.1 percent coupon bonds outstanding, $1,000 par value, 24 years to maturity, selling for 98.5 percent of par; the bonds make semiannual payments.         Common stock: 221,000 shares outstanding, selling for $84.10 per share; beta is 1.26.         Preferred stock: 13,100 shares of 5.8 percent preferred stock outstanding, currently selling for $96.90 per share.         Market: 7.05 percent market...
Use the appropriate information provided below to estimate a weighted average cost of capital for a...
Use the appropriate information provided below to estimate a weighted average cost of capital for a project with a planning life of about 10 years. Tax rate used for future estimates = 33.0% Current yield to maturity on company bonds = 5.78% Current yield on US Treasury bills = 1.73% Current yield on 10-year Treasury note = 3.76% Total assets = $560465 Current liabilities = $77696 Long-term debt = $95098 Shareholders' equity = $385213 Estimated market risk premium = 6.94%...
Information on Lightning Power Co., is shown below. Assume the company’s tax rate is 25 percent....
Information on Lightning Power Co., is shown below. Assume the company’s tax rate is 25 percent. Debt: 18,000 5.8 percent coupon bonds outstanding, $1,000 par value, 23 years to maturity, selling for 107.6 percent of par; the bonds make semiannual payments. Common stock: 610,000 shares outstanding, selling for $84.75 per share; beta is 1.05. Preferred stock: 27,500 shares of 4.45 percent preferred stock outstanding, currently selling for $92.50 per share. The par value is $100. Market: 6.8 percent market risk...
A firm has a cost of equity of 13 percent, a cost of preferred of 5...
A firm has a cost of equity of 13 percent, a cost of preferred of 5 percent, an after-tax cost of debt of 3.4 percent and a tax rate of 21%. Given this, which of the following will increase the firm’s weighted average cost of capital? Increase the firm’s tax rate Issuing new bonds at par Increasing the firm’s beta Increasing the debt/equity ratio Which of the following will decrease the after-tax cost of debt for a firm? Decrease in...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT