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Calculate the cost of equity capital for abc

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Reference no: EM133055789

You are a financial analyst and your boss provides you with the following information on ABC company:

  • The company has issued common stock equity and bonds to finance its operations.
  • ABC has currently 3 million stocks outstanding.
  • The current market price of ABC stock is £5.3
  • The beta of ABC stock is 1.2
  • The risk premium for the stock market is estimated at 8%.
  • The risk-free rate, which is determined by the central's bank reference interest rate, is 3%.
  • The corporate bonds of ABC have a face value of £100 per unit, are coupon-bearing, mature in 8 years from today, and they are currently selling at £106 per unit.
  • When the corporate bonds were issued they had a total face value of £5,000,000
  • According to the current market value of the corporate bonds, we can infer that bondholders demand a risk premium of 4% for holding the company's debt securities.

Assuming that all rates are annual and CAPM holds, your boss asks you to:

(i) Calculate the cost of equity capital for ABC.

(ii) Calculate the cost of debt capital for ABC.

(iii) Calculate the pre-tax WACC for ABC.

Reference no: EM133055789

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