Busn379 Week 6 Course Project Part 2 Essay

2. Establish how the cost of equity is affected by capital structure decisions by defining financial risk and introducing the levered beta CAPM equation

Yields iD = .052586, or 5.2586% on a semiannual basis. Since the cost of debt is normally quoted on a nominal annual basis, we should multiple this semiannual rate by two to get a quoted component cost of 5.2586% × 2 = 10.5172%

While it was not needed in SIVMED’s case, if the debt had not been recently traded, then other approaches must be used. Because the debt is rated BBB SIVMED can look at comparable companies to find similar ratings and get an accurate forecast of the cost of debt. It can be noted that the A-rated bond is 10 percent, therefore the cost of the BBB debt would be higher due to the increased riskiness. Using the book values, SIVMED can calculate it’s company’s cost of debt. Lastly, SIVMED can contact an investment banker and ask what the coupon rate would be on new debt.

The rate applied to determine the cost of debt should be the current market rate the company is paying on its debt. The forecasted cost of debt after tax is defined as 5%. Based on the Capital Asset Pricing Model (CAPM), where: Cost of Equity (Re) = Rf + Beta (Rm-Rf), DJS has an estimated cost of equity of approximately 13% (4.5% + 1.38 * 6%), representing a risk free rate of 4.5%, the beta of 1.38 sourced from Aspect Fin Analysis, and the market premium of 6%. (Table 2)

b. If the firm’s beta is 1.6, the risk free rate is 9% and the expected return on the market is 13%, what will be the firm’s cost of equity using the CAPM approach?

Cost of equity: Cohen used the current yield on 20-year Treasury bonds as risk-free rate (5.74%) then compounded average premium of the market over Treasury bonds (5.9%) for risk premium. As for beta, Cohen used the average of Nike’s beta from 1996 to 2001 (0.8).

The security market line approach (aka CAPM) is another method of determining the firm's cost of equity. The SML equation is as follows:

Explain how the cost of debt, cost of equity, and weighted average cost of capital are determined.

CAPM Approach: We first determined HP’s cost of common stock using the CAPM model. This formula is rs=rRF + (RPM)bi. Per our textbook, in a survey of many highly regarded companies, two thirds of those companies used the rate on a 10-year treasury bond as the closest estimate to a risk-free rate.

Molteni Motors Inc. recently reported $3.25 million of net income. Its EBIT was $7.75 million, and its tax rate was 35%. What was its interest expense? Round your answer to the nearest dollar. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000.

In early 2003, Michael, CFO of Aurora Textile Company, is deciding whether or not to install a new machine called Zinser 351 in order to save the declined sales and increase its competitive force. In deciding whether or not to invest Zinser 351, it is important to get the NPV and the payback period. To get the NPV and the payback period, we firstly need to forecast the future cash flows that the new machine will generate. We found the ten-year NPV to be $3,171,551 based on the FCFs that we forecast. Also, we use the payback period to analyze the acceptance of this project. We found that the discounted payback period is 5.69, which is less than the arbitrary cutoff point of 7.87. Based on our

The project’s duration is three years and the Planning Department thinks that the adequate real interest rate is 7.398%. The corporate tax is 40%.1 (a) Analyse the economic viability of the project, assuming real prices. (b) The

EL = (EBIT – I) × (1 - TC) = (270,000 – 31,704.5) × (1 - .4) = 571,909.1

what is the cost of capital. Finally, we provide insights into the use of the CAPM or multibeta

1.a) X Ltd. issues Rs.50,000 8% debentures at par. The tax rate applicable to the company is 50%. Compute the cost of debt capital.