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Calculate the weighted average cost of capital

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Reference no: EM133189772

Question - A company called Amanda Ltd has a capital structure as at 31st December 2021 as follows:

Debt $200m

Equity $600m

Total $800m

Amanda Ltd's expected dividend in one year's time is $4 per share. The market price per share as at 31st December 2021 is $40 per share.

The expected growth rate for the year is 3% and the cost of debt before tax is 8%. The firms tax rate is 20%.

Required -

(a) Calculate the effective cost of debt taking into account the impact of taxation.

(b) Calculate the cost of equity and explain what it represents.

(c) Discuss why it is often the case that the cost of equity for a firm is higher than the cost of debt.

(d) Calculate the weighted average cost of capital and explain what this represents.

Reference no: EM133189772

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