Strathclyde Inc., a private biotechnology company, is currently estimating their required rate of return for raising debt and equity financing and has obtained the following information: Government bonds currently carries an interest rate of 4.25% Considering the riskiness of the industry, the estimated credit spread of biotechnology companies averages at around 3.5% to 4.5% Strathclyde Inc., as a mature biotech company is the least risky company within the industry Equity market during these challenging times of crisis demands a 3.25% premium compared to government securities Considering how returns of Strathclyde Inc. compares to
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Strathclyde Inc., a private biotechnology company, is currently estimating their required
- Government bonds currently carries an interest rate of 4.25%
- Considering the riskiness of the industry, the estimated credit spread of biotechnology companies averages at around 3.5% to 4.5%
- Strathclyde Inc., as a mature biotech company is the least risky company within the industry
- Equity market during these challenging times of crisis demands a 3.25% premium compared to government securities
- Considering how returns of Strathclyde Inc. compares to the overall equity market returns, the estimated beta is at negative 0.5
38. How much is the equity risk premium for Strathclyde Inc.?
Answer should be with 2 decimal points without the percentage sign (e.g., 3.00). Don't forget to indicate whether your answer is positive or negative.
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