1. As a financial analyst, you are analysing Company XYZ and calculating its cost of capital. The stock price of XYZ is £100 and it has 20 million shares outstanding. XYZ’s debt rating is BB. The book value of debt is £600 million and market value of debt is £500 million. XYZ’s tax rate is 20%. Please round your results to the second digit to the right of the decimal point.

 

REQUIRED:

1. You have also collected information on capital markets. The risk free rate is 1%. The return on the S&P 500 index is 9%. The relationship between debt rating and debt beta is shown in the following table.

Rating	AAA	AA	A	BBB	BB	B	CCC
Average Beta	0.05	0.05	0.05	0.1	0.17	0.26	0.31

 

What is the value of market risk premium? What is the cost of debt for Company XYZ.

Assume the equity beta of XYZ is 2.5. Please calculate the cost of equity for Company XYZ.

Assume that Company XYZ’s book value of assets is £1600 million. What is its book value of equity? Please calculate the average cost of capital (WACC) for Company XYZ.

Assume XYZ’s leverage ratio is fixed. Please calculate the unlevered cost of capital for Company XYZ.

Assume Company XYZ has a new project with the same risk as the firm. The WACC and the unlevered cost of capital for Company XYZ have been estimated in the previous steps. Which one of them is more appropriate to be the cost of capital for the project’s NPV calculation? Please briefly explain the reason.

Answer rating: 100% (QA)

ans 1 Given Amts in Pound RiskFree Rate Rf1 SP 500 Index Return Market Rate of Return Rm9 Market Risk PremiumRpm Market Rate of ReturnRisk Free RateRm... View the full answer