If the risk free rate is 4% and the market risk premium is 6%, use the

6. Go online to http://www.reuters.com/finance/stocks/ and type in the code for your company into the Search Stocks field and click on the magnifying glass button

 

. i) What is their calculated beta (β) for your company? 2 marks

ii)If the risk free rate is 4% and the market risk premium is 6%, use the Capital Asset Pricing Model (CAPM) to calculate the required rate of return for the companies’ shares. 4 marks

iii) Is the company you have chosen a “conservative” investment? Explain your answer. 2 marks

7. Weighted Average Cost of Capital (WACC) i) Using information from the latest company report for the company (i.e. interest rate on their major source of long-term loans) and the estimated cost of equity capital calculated (in part 6ii above), calculate the WACC for your company. 6 marks ) Explain the implications that a higher WACC has on management’s evaluation on prospective investment projects. 4 marks 8. Consider the debt ratio for your company over the past two years: i) Does it appear to be working towards the maintenance of a preferred optimal capital structure? (i.e., does it appear to be “stable”?). Explain your answer. 4 marks ii)What have they done to adjust/amend their gearing ratio? Increase or repay borrowings? Issue or buy back shares? Has the Director’s Report given any information as to why they have made any adjustments? 4 marks 

#risk #free #rate #market #risk #premium

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