Calculate the cost of capital Assuming that there is an unlevered firm and a levered firm. The basic information is given by the following table. Table 1: Information of the firms Unlevered firm Levered firm EBIT 10,000 10,000 Interest 0 3,200 Taxable income 10,000 6,800 Tax (tax rate: 34%) 3,400 2,312 Net income 6,600 4,488 CFFA 0 -3,200 Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Calculate the cost of capital
Assuming that there is an unlevered firm and a levered firm. The basic information is given by the following table.
Table 1: Information of the firms
|
Unlevered firm |
Levered firm |
EBIT |
10,000 |
10,000 |
Interest |
0 |
3,200 |
Taxable income |
10,000 |
6,800 |
Tax (tax rate: 34%) |
3,400 |
2,312 |
Net income |
6,600 |
4,488 |
CFFA |
0 |
-3,200 |
Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5
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