You have been tasked with the responsibility of calculating the WACC for Meeks Investments Limited and Hall Developments Limited. The risk-free rate is currently 4% and the market risk premium is 6.5%. The details for both companies are presented in the table below. The tax rate is 25%. Meeks Investments Limited Hall Developments Limited Value of Common Equity $1,500,000 $3,000,000 Beta 2.18 1.52 Value of Preferred Equity $1,000,000 $500,000 Preferred Dividends $4.50 $7.60 Price of Preferred Stock $60 $80 Price of Bonds $970 $1,160 Coupon Rate (Paid semi-annually) 8% 11% Par Value of Bonds $1,000 $1,000 Years to Maturity 8 12 Value of Debt $2,500,000 $1,500,000 Use the information in the table above to calculate the WACC for both companies.
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.
You have been tasked with the responsibility of calculating the WACC for Meeks Investments Limited and Hall Developments Limited. The risk-free rate is currently 4% and the market risk premium is 6.5%. The details for both companies are presented in the table below. The tax rate is 25%.
|
|
Meeks Investments Limited |
Hall Developments Limited |
|
Value of Common Equity |
$1,500,000 |
$3,000,000 |
|
Beta |
2.18 |
1.52 |
|
Value of Preferred Equity |
$1,000,000 |
$500,000 |
|
Preferred Dividends |
$4.50 |
$7.60 |
|
Price of |
$60 |
$80 |
|
Price of Bonds |
$970 |
$1,160 |
|
Coupon Rate (Paid semi-annually) |
8% |
11% |
|
Par |
$1,000 |
$1,000 |
|
Years to Maturity |
8 |
12 |
|
Value of Debt |
$2,500,000 |
$1,500,000 |
Use the information in the table above to calculate the WACC for both companies.
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