Weighted average cost of capital.

Weighted average cost of capital
Weighted Average Cost of Capital of Company
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Weighted average cost of capital
Table of contents
Answers 2
Question 1 2
Question no.2 6
Question 3 10
4. Weighted average cost of capital using book value as weights and market value as weights.
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5. Potential problems 15
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Weighted average cost of capital
Part 2
Introduction
In this part the cost of capital of Hubbard computer limited will be calculated by the
representative company, Harvey Norman. The latest stock price, shares outstanding, latest annual
dividend of Harvey Norman has been analyzed in details. The cost of equity by applying capital
assets pricing have also been determined and analyzed. The weighted average cost of capital of
the representative company has been calculated. The issues has been discussed which can arise
with the approach of choosing pure play company.
Answers
1. Weighted average cost of capital
Whenever a company needs fund to run their businesses efficiently and smoothly, they borrow
funds from the market. According to Baker and Wurgler (2015, p-320), the cost of capital is an
essential tool which is used to measure the expected return of the debenture holders or investors
or shareholders of the company. Financial analysts prefer weighted average cost of capital to
assess the minimum return which they expect from the company. Company raised funds through
different sources. To arrange sources of finance companies issues equity shares or preference
shares or long term debenture or bonds to run their businesses efficiently and effectively. To
arrange the funds from different sources, company has to incur some cost, which is known as
cost of capital. As it can be analyzed that Hubbard Computer limited is a privately owned
company and Bob Hubbard who is the founder of the company wants to measure the cost of
capital of company. So, the founder of Hubbard Computer limited has chosen Harvey Norman as
a pure play company or representative company to assists HCL to analyze the cost of capital. To
assess the weighted average cost of capital of HCL, it is necessary to calculate the cost of
different sources of the company such as:
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Weighted average cost of capital
Question 1
What is the latest book value of equity and book value of debt of Harvey Norman?
The recent book value of equity of Harvey Norman for the year June 2018 is $2,937,932,000,
which includes-
$ (000)
Contributed equity 388,381
Retained profits 2,337,241
Reserves 185,384
Non-controlling interests 26,926
The recent book value of debt of Harvey Norman for the year June 2018 is $809,746,000 which
includes-
$(000)
Interest-bearing loans and borrowings 503,203
Deferred income tax liabilities 280,735
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weighted
average cost
of capital
cost of
long term
debunture
cost of
equity
cost of
retained
earnings
cost of
preferenc
e share
capital