Estimate the current cost of capital of rio tinto

Assignment Help Finance Basics
Reference no: EM132739874

Rio Tinto Inc., which is a Canadian company and one of the global leaders in aluminum mining and production, is re-examining its capital structure and whether it has any excess debt capacity. In 2015, Rio Tinto had 12.2 million shares outstanding at $210 per share and debt outstanding of $3 billion (book as well as market value). The debt had a rating of B and an interest rate of 10.12%. In addition, the firm had leases outstanding, with annual lease payments of $150 million (lease payments are perpetual and made at the end of the year). The beta of the stock is 1.26, and the firm faces a tax rate of 35%. The Treasury bond rate is 6.12%. The market risk-premium is 5.5%.

a. What is the firm's current debt/equity ratio?

b. Estimate the current cost of capital of Rio Tinto

c. Your analysis shows that the optimal debt ratio (debt/total firm value) should be 30%. At this level of debt, the rating will be BBB and the interest rate on debt will be 8.12%. Estimate the optimal cost of capital.

d. Rio Tinto is considering acquiring a patent that would allow it to have exclusive rights on aluminum production in South Africa for the next 15 years. The initial investment related to the patent is $500 million and the related increase in cash flow will be $300 million with a standard deviation of 25%. Assume that the risk-free rate is now 4%. What is the maximum price that Rio Tinto would pay for this patent?

Reference no: EM132739874

Questions Cloud

Financial management of healthcare facilities : What are the differences and similarities between a financial management of healthcare facilities and finical managers of other types of businesses?
Describe your skill and experience in doing interviews : Describe your skill and experience in doing interviews. What do you bring to the table? What skills do you feel you lack? Look toward the next week.
What is the yield to maturity on bonds : The bonds have a par value of $1,000, a current price of $960, and they will mature in 15 years. What is the yield to maturity on these bonds?
What amount should be reported as investment in preference : P140 and the market price of the investee's preference share was P100. What amount should be reported as investment in preference shares?
Estimate the current cost of capital of rio tinto : Rio Tinto Inc., which is a Canadian company and one of the global leaders in aluminum mining and production, is re-examining its capital structure
Find the probability of overbooking : In order to use a binomial model in this problem, what assumptions are necessary? Are these reasonable? Find the probability of overbooking
Estimate what is the price of the stock today : You are considering buying a stock,The dividend is expected to grow at 5.6% per year forever. The interest rate is 10.6%. what is the price of this stock today?
Explain the role and social position of the social worker : Explain the role and social position of the social worker in working with the client in the case study. Describe how the role(s) and social position(s) assumed.
Difference between bond ytm and ytc : What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)

Reviews

Write a Review

Finance Basics Questions & Answers

  Suggest the financial ratio that most financial analysts

suggest the financial ratio that most financial analysts would use to evaluate the financial condition of the company.

  You paid 98000 for a 100000 t-bill maturing in 120 days if

question 1 why do ratings agencies assign ratings to commercial paper?question 2 based on what you know about

  Increase or decrease marketing spending

Executive Summary: Introduce the current status of your company a brief overview of your company's status. Include the good and the bad.

  How many common shares are currently outstanding

Harper Industries has $700 million of common equity on its balance sheet; its stock price is $22 per share; and its market value added (MVA) is $70 million.

  Calculate portion of first monthly payment contributed

Calculate the portion of the first monthly payment contributed towards interest in cell D12. Calculate the portion of the first monthly payment contributed towards principal in cell E12.

  Jane skinner has just graduated from college and would like

jane skinner has just graduated from college and would like to purchase her first car. she is unfamiliar with the

  If the contract price declines by 25 basis points by how

assume the initial margin on a eurodollar futures contract is 878 and the maintenance margin is 650 the contract size

  Economy of islandia and its market for bananas

Consider the small closed economy of Islandia and its market for bananas. Currently, the domestic demand and supply curves for bananas are given by the following equations:

  Strategic plan for place of employment

Create a 1,050- to 1,400-word strategic plan for your place of employment or a company with which you are familiar.

  Minimum expected annual return for share

She has decided to invest in shares 1,2 and 3 with 25% in share 1, 50% in share 2 and 25% in share 3. If shares 1 and 2 have expected returns of 9% and 10% per year, then what is the minimum expected annual return for share 3 that will enable mega..

  Pfizer capital structure analysis

Conduct a capital structure analysis in which you analyze the various debt/equity instruments employed by organization, as well as the impact on the EPS, PE Ratios, and Price per share.

  Firm roe and roic-logan trucking

Logan Trucking's net income is $55,000, its interest expense is $20,000, and its tax rate is 40%

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd