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Calculate the cost of debt of the bond and the bank debt

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Reference no: EM132538219

WACC - Romo

  • Romo PLC is an oil services company considering setting up a new operation in Dallas in the USA. It is reviewing its cost of capital before committing to the project.
  • There are 2,500,000,000 shares in issue which trade at £3.51 and its beta is 0.9. After conducting some research you decide that an appropriate risk free rate is 2.8% and market risk rate is 9.3%. The company paid a dividend last year of 15p and its expected growth rate is 4%.
  • The company has a bond outstanding of £3,850 million with a coupon of 4% trading at 105p. The company also has bank borrowings of £1,750 million on which it pays 3.75%. The company's tax rate is 26%.

Question a) Calculate the Cost of Equity using the CAPM method and Dividend Valuation Method

Question b) Calculate the cost of debt of the bond and the bank debt

Question c) Calculate the WACC using the CAPM result

Question d) Explain what the market risk premium (Rm - Rf) represents

Question e) Explain why the interest rate is adjusted for tax

Reference no: EM132538219

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