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Weighted Average Cost of Capital of the Hotel

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Added on  2021-06-17

Weighted Average Cost of Capital of the Hotel

   Added on 2021-06-17

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Running Head: Finance 1
Weighted Average Cost of Capital of the Hotel_1
Finance 2Question-7:1.Estimate WACC of the firm:The WACC of the Hotel Shilla co Limited has been calculated to identify the total cost of capital of the company. The cost of debt and cost of equity of the company has been calculated firstly which are as follows:Calculation of cost of equity:Cost of equity has been calculated through CAPM model. The calculation of cost of equity has been calculated on the basis of beta, risk free rate and market premium rate. The cost of equity of the company is 2.85%.Calculation of cost of equity(CAPM)RF2.69%RM9.04%Beta0.025491904Required rate of return2.85%Calculation of CAPM item:The beta of the company has been calculated through evaluating the historical data of the company of last one year and the stock price of the company has been compared with the stock price of S&P 500. The beta of the company is 0.025 (yahoo finance, 2018). Calculations have been given in the appendix. Further, the market risk premium of the company is 9.04% which has been found from market risk premia, 2018. The risk free rate has been taken from (Bloomberg, 2018) which is 2.69%. Thus the cost of capital of the equity is 2.85%. Cost of debt:Cost of equity has been calculated through evaluating the interest rate and tax rate. The calculation of cost of equity has been calculated on the basis of interest rate and tax rate. The cost of equity of the company is 3.00%, the calculations of cost of debt of the company isas follows:Calculation of cost of debt
Weighted Average Cost of Capital of the Hotel_2
Finance 3Outstanding debt64,85,51,363interest rate4.00%Tax rate25.0%Kd3.00%(Trading economics, 2018)Appropriate weight of debt and equity:On the basis of the Morningstar (2018), it has been found that the appropriate weight of debt and equity of the company is 0.49 and 0.51 respectively. The calculation of weight of debt and equity are as follows:Appropriate weight of debt and equityPriceWeightDebt 64,85,51,3630.49Equity66,74,85,5080.511,31,60,36,871WACC:Thus, the WACC of the company is 2.92%. Capital structure of Hotel shilla CoPriceCost WeightWACCDebt 64,85,51,3633.00%0.4928060.014784Equity66,74,85,5082.85%0.5071940.0144651,31,60,36,871Kd2.92%
Weighted Average Cost of Capital of the Hotel_3

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