Droz's Hiking Gear has found that its ordinary share capital has a beta equal to 1.5 while
Question:
Droz's Hiking Gear has found that its ordinary share capital has a beta equal to 1.5 while the risk-free return is 8 per cent and the expected
return on the market is 14 per cent. It has 7-year maturity bonds outstanding with a price of €767.03 that have a coupon rate of 7 per cent.
This company is financed with €120 000 000 of ordinary shares (market value) and €80 000 000 of debt. Yield to maturity is 12 per cent. Marginal tax rate is 35 per cent. Face value of the bond to be taken as €1000. Annuity factor table given at the end of the question paper.
REQUIRED:
1) Estimate the after-tax weighted average cost of capital.
2) Name the most important factors, influencing WACC.
3) Using CAPM, calculate Expected rate of return of Droz's Hiking Gear.