vianh1269
6th May 2009, 14:21
I had a problem with this exercise:
Part A:
Calculate the cost of capital for TLC Ltd. On the assumption that investors can remove all unsystematic risk by diversification.
- The systematic risk of TLC Ltd's equity is 0.80
- The risk free rate is 10%
- The expected rate of return on the market portfolio is 15%
- The sources of funds usd by TLC Ltd and their respective market values are as follows:
Source of Funds Market Value ($m)
Debt (par value $100) 1
Equity 3
- The interest rate on the debt is 11% paid annually. The debt, which is due to mature in eight years' time, has a current market price of $111.
- The company tax rate is 30%.
PartB:
Under what assumptions is the cost capital you have calculated for TLC Ltd in (Part A) appropriate for a proposed project?
Part A:
Calculate the cost of capital for TLC Ltd. On the assumption that investors can remove all unsystematic risk by diversification.
- The systematic risk of TLC Ltd's equity is 0.80
- The risk free rate is 10%
- The expected rate of return on the market portfolio is 15%
- The sources of funds usd by TLC Ltd and their respective market values are as follows:
Source of Funds Market Value ($m)
Debt (par value $100) 1
Equity 3
- The interest rate on the debt is 11% paid annually. The debt, which is due to mature in eight years' time, has a current market price of $111.
- The company tax rate is 30%.
PartB:
Under what assumptions is the cost capital you have calculated for TLC Ltd in (Part A) appropriate for a proposed project?