A company has both its shares and bonds listed on the stock market. The company has 2.5 million shares outstanding. The market value of each share is €40, but based on the book value of equity, the value of each share is €10.
The company has two bond classes listed on the stock market. Bond 1 has a nominal value of €50 million (face value) and the annual nominal interest rate (coupon) is 9.0%, which is calculated twice a year. The market value of each bond share is 93 per 100 of the nominal value. Bond principal 1 is paid after 12 years (time to maturity).
Bond 2 has a nominal value of €30 million (face value) and the annual nominal interest rate (coupon) is 8.0%, which is calculated twice a year. The market value of each bond share is 96.5 per 100 of the nominal value. The principal of bond 2 is paid after 6 years (time to maturity).
The company pays 20% income tax. The company's equity has a beta value of 1.30. The risk-free rate is 6.20%. The risk premium of the stock market is 8%. When estimating the total cost of capital, the cost of debt (YTM) is found as a weighted average of the bond yields 1 and 2.

a) What is the capital composition of the company according to its balance sheet (book value)?
b) What is the capital composition according to the company's market value?
c) What is the difference between the factors mentioned in points a and b (book value vs. market value) and what is its significance? Which is more appropriate to use when working with capital costs and investment options?
d) What is the firm's weighted average cost of capital (WACC)?

Answer rating: 100% (QA)

Capital Composition and Cost of Capital Analysis a Book Value Capital Composition Shares 25 million ... View the full answer