Importance of Accurate Risk Forecasts

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Term Figure Source Risk Free Rate 0.037 2007 T-Bill yields Beta coefficient 1.25 Given EMRP 0.05 Given Cost of Equity 0.0995 Risk free rate + beta(EMRP) Cost of Debt 0.067 Interest Expense /(Liabilities & Equity - Equity) Debt 81078 Given Equity 97280 Given Tax Rate 0.3858 Taxes/Income before taxes WACC 0.07298 Given equation The current weighted average cost of capital for the company, based on these initial figures, appears to be slightly higher than 7% (7.298%, to be more precise). With a current payout ratio of more than twenty percent on shareholder equity, borrowing money to repurchase stock might not be a bad idea at this stage; borrowing can likely be accomplished at a much cheaper rate and will incur less costs to carry the debt than would selling more equity or even simply failing to repurchase existing outstanding equity. The company could retain a much greater share of its earnings and increase profit margins significantly without cutting dividends and lowering the rate of return on investments in the firm. This additional money could be utilized in many different areas of the company, form operational divisions to the capital management division, in order to increase profitability still further. Simply put, the cost of increased debt is far lower than the cost of equity and given the current rating of the company's debt borrowing in order to increase
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