International Cost of capital Assignment Example | Topics and Well Written Essays - 1750 words

International Cost of capital - Assignment guinea pigQuestion1. Provide an illustrative example of WACC calculation using a FTSE100 company. Answer The comp sensationnts of weighted average of appeal of capital come from the justice side of the statement of financial position, which is commonly understood and known as balance sheet-common shares, preferred shares and debt, abundant term liability are the servings of capital. Any change in the puzzle out of increase in assets of the balance sheet would require increasing at least any one of components of the capital account. In order to increase the liability side of the balance sheet, the price of these components is called as component based cost of capital. Numerous causes require to occur or to increase the cost of capital. First, the need of long term investment funds and long term financing requires a company to determine and decide an appropriate way of arranging finance. Either willingly or unwillingly, the company ha s to evaluate all possible and getable means that after part be used for the purpose of satisfying their long term business investment needs. Some companies use and issue preferred shares for the purpose of raising finance. ... On the whole, these both means constitute some sort of similarities and some sort of dissimilarities. Preferred shares are mostly placed with the ordinary shares, on the other hand, the debentures and other forms of long term liabilities are incorporated in the long term liability section of the statement of financial position. Following is the standard computational method of weighted average of cost of capital WACC = Ke (market value of equity/A) + kd (1-t) (market value of debt/A). Where WACC= weighted average of cost of capital Ke= cost of equity A=market value of equity + market value of debt Kd= cost of debt Cost of equity (Ke) is the needful return on the ordinary shares. Most of the time, it is this feature that is pretty difficult to estimate. Co st of equity can be determined by two ways dividend growth place and capital asset set beat (CAPM). The dividend growth model uses the following formula P0 = D1/ (Re-g) Here, P0 is the current birth price or stock price in the period of 0. D1 is the amount of dividend in the next period or next year. Re is the cost of equity. G is the dividend growth rate. For ke the equation would become Re= D1/ P0+ g The capital asset price model (CAPM) helps with the following equation to determine the cost of equity Re= Rf+ b(Rm - Rf) Here, Rf= the stake free rate. B= beta value Rm= market return Capital asset pricing model was determined and defined and published its derivation by William Sharpe in the year of 1986 (Megginson, 1996). There are numerous assumptions on which capital asset pricing model is based on. For instance, capital asset pricing model assumes that investors hold diversified range of portfolios (Head, 2008). Example Computation of weighted average of