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Financial Management & Int Finance Study

   

Added on  2020-04-01

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Cost of Capital[Type the abstract of the document here. The abstract is typically a short summary of the contentsof the document. Type the abstract of the document here. The abstract is typically a short summary of the contents of the document.]
Financial Management & Int Finance Study_1
Cost of debtFace value of debt = $1,800,000Maturity = 2 yearsCoupon rate = 5.8% p.a paid semi annuallyThe debt rating of the company is AAA, hence according to the credit rating table the yield on bond for 2 years is 0.26%.Cost of debt = 0.26%Cost of Preference shareAnnual dividend = $0.56Price of share = $9.30Cost of preferred capital = annual dividend / price of share= 0.56 / 9.3= 6%Cost of EquityRisk free rate is considered as the 10 year yield on AAA rated bond which is 0.76%.Beta = 1.4Market risk premium = 9.6%Cost of equity = Rf + (Beta * market risk premium)= 0.76% + (1.4*9.6%)= 13.7%For weights of each capital, the market value is determined as follows:Market value of debtPrice of bond = C*F * ((1-(1+r)-t) / r
Financial Management & Int Finance Study_2

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