The Chief Financial Officer (CFO) of the R60F Company is interested to identify the value of this company under multiple methods, for example, discounting dividend method using cost of equity or discounting cash flows using WACC. The company has 5 million shares, It has $60 million of debt at an interest rate of 6.4 per cent. The market believes that R60F can generate earnings of $14 million before interest and tax in perpetuity, and that R60F's beta coefficient is 2.1. R60F will pay out its available profits as dividends to its shareholders. Market risk premium is 5.6 per cent and govt bond yields 4.1 per cent. Tax rate is 40 per cent.

Requirement-a. Calculate cost equity and WACC for R60F.

Requirement-b. Calculate market value of R60F using suitable methods.

Requirement-c. Using your own words (would be checked for possibility of plagiarism), briefly comment on the consistency or inconsistency you find between discounting dividend and discounting cash flows to derive equivalent values.

Requirement-d. Using your own words (would be checked for possibility of plagiarism), briefly explain the impacts, if any, of business risk and financial risk of all-equity and leveraged firms on respective weighted average costs of capital.

Answer rating: 100% (QA)

a Cost of equity Risk free rate Beta Market risk premium Cost of equity 41 21 56 Cost ... View the full answer