Calculate the cost of capital for rio tinto

Assignment Help Financial Management
Reference no: EM13843479

PART 1: Finance in the News

In your group of two maintain a portfolio of four financial news articles and critically evaluate how the financial issue in each article relates to the theory studied in class. Analyse similarities, differences between issues in the articles studied and theory learned in class and make a conclusion concerning the application of financial theory in real life for each article. You may need to do additional research to understand certain terms in the articles. Calculations are encouraged if the article contains data.

PART 2: Cost of Capital

Based on the information below calculate the cost of capital for Rio Tinto and state two reasons for why it may have declined since the GFC. Justify your answers using theory, calculations and research into current events.

In the years before the global financial crisis, Rio Tinto has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that has been proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Rio Tinto's cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task:

(1) The firm's tax rate is 30%.

(2) The current price of Rio Tinto's 12% coupon, semi-annual payment, non-callable bonds with 15 years remaining to maturity is $1,153.72. Rio Tinto does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost.

(3) The current price of the firm's 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. Rio Tinto would incur flotation costs equal to 5% of the proceeds on a new issue.

(4) Assume Rio Tinto's last annual dividend (D0) was $3.12, and dividends are expected to grow at a constant rate of 5.8% in the foreseeable future. Rio Tinto's beta is 1.2, the yield on government bonds is 5.6%, and the market risk premium is estimated to be 6%.

(5) Rio Tinto's target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity.

(6) Suppose the firm has historically earned 15% on equity (ROE) and retained 35% of earnings, and investors expect this situation to continue in the future.

Reference no: EM13843479

Questions Cloud

What is the role of capacitor in ac and dc circuit : What is the Role of Capacitor in AC and DC Circuit? and what is his Capacitance Equation ?
What is the labor-hours productivity ratio : Student tuition at Paddington University is $150 per semester credit hour. As part of a deal the state supplements school revenue by matching student tuition dollar for dollar. What is the multifactor productivity measure for a course at Paddington U..
Change managers play and active role in the initiation : Why do you think it is significant that change manager’s play and active role in the initiation, support, and outcomes of organizational change?
What are some criticisms of sustainable business : Do you think sustainable business practices have a positive impact on business success? What are some criticisms of sustainable business? Do you agree with the triple bottom line?
Calculate the cost of capital for rio tinto : Calculate the cost of capital for Rio Tinto and state two reasons for why it may have declined since the GFC. Justify your answers using theory, calculations and research into current events.
Functions as a minimum two-level nand : Realize each of the following functions as a minimum two-level NAND-gate circuit and as a minimum two-level NOR-gate circuit. (a) F(A,B,C,D) = BD′ + B′CD + A′BC + A′BC′D + B′D′ (b) f(a,b,c,d)=ΠM(0,1,7,9,10,13)·ΠD(2,6,14,15)
The global reporting initiative is beneficial : The Global Reporting Initiative is beneficial because
Main argument against corporate social responsibility : Milton Friedman's main argument against corporate social responsibility is
One of the interesting developments in urban automobile : One of the interesting developments in urban automobile usage is

Reviews

Write a Review

 

Financial Management Questions & Answers

  Fundamental factors of your selected bank

Examine the fundamental factors of your selected bank. On the basis of this fundamental analysis and other methods of share valuation, determine if your selected bank is overvalued or undervalued.

  The marginal production cost for the publisher is 1 per

a publisher sells books to borders at 12 each. borders prices the book to its customers at 24 and expects demand over

  Change in accounting estimate

Change in accounting estimate

  What was average annual risk premium on small-company stocks

What was the average annual risk premium on small-company stocks for the period 1926-2011?

  Determine the measures for 2012

Determine the measures for 2012, rounding to one decimal place, except for dollar amounts, which should be rounded to the nearest cent. Assume 365 days a year.

  Iridium case study

Is anyone familiar with the "Iridium"/(Motorola) case study? Why did Motorola finance Iridium with project debt instead of corporate debt?

  Te six month gold futures price is currently 1598 the

the six month gold futures price is currently 1598. the riskofree interest rate is 4.50nbsp per annum with

  Purchase of a new plastic stamping machine

FIN370 Big Steve's, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $110,000 and will generate net cash inflows of $17,000 per year for 9 years.

  Describe the liability of the partnership-fresher flowers

Fran, Joe, and Mike formed a general partnership to operate a flower shop called Fresher Flowers. One of Fran’s jobs is to make deliveries using the partnership truck. In one such delivery, Fran negligently ran a stop sign, striking a car driven by P..

  What is the yield to call for these bonds

Atlantis Fisheries issues zero coupon bonds on the market at a price of $514 per bond. Each bond has a face value of $1,000 payable at maturity in 14 years. It is callable in 7 years at a call price of $640. Using semi annual compounding, what is the..

  Expenditures minus taxes-maturing government debt

T-bills are issued by the US government to cover the following except: their deficits. expenditures minus taxes. maturing government debt.all of the above are true.

  Salon quarterly financial statements

Would this pose any problems for the banker (at the bank where the salon borrows money) who reviews the salon's quarterly financial statements?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd