Calculation of Weighted Average Cost of Capital and Gearing Ratios of Wesfarmers (Coles)

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Assessment Task: 2

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Task 1 and 2: Calculation of weighted average cost of capital (Including explanation of
calculations and judgments made in arriving the answers)
(a) Risk free rate of Return
In this section current risk free rate has been determined through using the information
provided on the Reserve Bank of Australia. Risk free rate is taken of 10 years maturity period of
Capital Market Yields of Government Bonds. Link to Reserve Bank of Australia is
https://rba.gov.au/statistics/tables/#interest-rates. The value of interest rate of 10 years
Government Bond as on 31 Dec, 2018 was 2.43% (Reserve Bank of Australia, 2019).
(b) Market equity premium rate of return
In this section of the assignment market rate of return has been calculated through using
the historical market premium method. Market equity premium refers to market return less risk
free rate of return. Under historical market premium method market return is calculated as
average of market return for last ten years. For this purpose there is need to find the market index
on which Wesfarmers (Coles) is being traded. Wesfarmers (Coles) is traded on Australian Stock
Exchange and it is listed under ASX 200 index. In order to calculate the average historical
market premium, market price of last 10 years has been selected and data has been taken from
January 01, 2009 to December 31, 2018. In order to calculate the data it has been decided to
extract the historical price form the Yahoo Finance. Historical data of last years of ASX 200 has
been given below (Source: Yahoo Finance: ASX 200, 2019).
Monthly price of ASX 200
for last ten years
Date
Adjusted
Close
31/01/2009 3344.50
28/02/2009 3582.10
31/03/2009 3780.50
30/04/2009 3818.00
31/05/2009 3954.90
30/06/2009 4244.00
31/07/2009 4479.10
31/08/2009 4743.60
30/09/2009 4643.20
31/10/2009 4701.40
30/11/2009 4870.60
31/12/2009 4569.60
31/01/2010 4637.70
28/02/2010 4875.50
31/03/2010 4807.40

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30/04/2010 4429.70
31/05/2010 4301.50
30/06/2010 4493.50
31/07/2010 4404.20
31/08/2010 4582.90
30/09/2010 4661.60
31/10/2010 4584.40
30/11/2010 4745.20
31/12/2010 4753.90
31/01/2011 4831.70
28/02/2011 4837.90
31/03/2011 4823.20
30/04/2011 4708.30
31/05/2011 4608.00
30/06/2011 4424.60
31/07/2011 4296.50
31/08/2011 4008.60
30/09/2011 4298.10
31/10/2011 4119.80
30/11/2011 4056.60
31/12/2011 4262.70
31/01/2012 4298.50
29/02/2012 4335.20
31/03/2012 4396.60
30/04/2012 4076.30
31/05/2012 4094.60
30/06/2012 4269.20
31/07/2012 4316.10
31/08/2012 4387.00
30/09/2012 4517.00
31/10/2012 4506.00
30/11/2012 4649.00
31/12/2012 4878.80
31/01/2013 5104.10
28/02/2013 4966.50
31/03/2013 5191.20
30/04/2013 4926.60
31/05/2013 4802.60
30/06/2013 5052.00
31/07/2013 5135.00
31/08/2013 5218.90
30/09/2013 5425.50
31/10/2013 5320.10