User Account

All Pages

Estimate the current cost of capital of rio tinto

Assignment Help Finance Basics
Reference no: EM132743756

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: EM132743756

Questions Cloud

Compute the cost of units completed and transferred : The assembly department has no beginning Work-in-Process Inventory. Compute the cost of units completed and transferred to the testing department
What is the yield to maturity on bonds : Consider some bonds with one annual coupon payment of 4.50%. The bond shave a par value of $1,000, a current price of $960, and they will mature in 15 years.
Which is the false concerning common and preferred stock : Which is the FALSE concerning common and preferred stock? Paid-in capital (pertaining to common or preferred stock) and retained earnings are internally
MD4044 Entrepreneurship Theory and Practice Assignment : MD4044 Entrepreneurship Theory and Practice Assignment Help and Solution, University of Central Lancashire - Assessment Writing Service
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
Briefly explain how to correct the identified errors : AAA Pty Ltd prepared the draft of the statement of financial position and the statement of profit or loss for the financial year ended 31st Dec. 20X8 as shown.
What journal entries should be made to record : Using three processes of Boiling, Fermenting, and Shipping, what journal entries should be made to record this period's activities?
Difference between bond ytm and ytc : What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)
Prepare a necessary entry for the given date : Sunland Company signed a long-term noncancelable purchase commitment with a major supplier to purchase raw materials in 2021 at a cost of $919,600.

Reviews

Write a Review

Finance Basics Questions & Answers

  Financial reporting and analysis

Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..

  A report on financial accounting

This report is specific for a core understanding for Financial Accounting and its relevant factors.

  Describe the types of financial ratios

Describe the types of financial ratios and other financial performance measures that are used during venture's successful life cycle.

  Differences between sole proprietorship and corporation

Briefly describe the major differences between a sole proprietorship and a corporation

  Prepare a cash budget statement

Calculate the expected value of the apartment in 20 years' time. What is the mortgage loan repayment at the beginning of each month

  What are the implied interest rates

What are the implied interest rates in Europe and the U.S.?

  State pricing theory and no-arbitrage pricing theory

State pricing theory and no-arbitrage pricing theory

  Small business administration

Identify the likely stage for each venture and describe the type of financing each venture is likely to be seeking and identify potential sources for that financing.

  Effect of financial leverage

The Effect of Financial Leverage and working capital management

  Evaluate the basis for the payment to the lender

Evaluate the basis for the payment to the lender and basis for the payment to the company-counterparty.

  Importance of opps, ipps, mpfs and dmepos

Research and discuss the differences and importance of : OPPS, IPPS, MPFS and DMEPOS.

  Time value of money

Time Value of Money project

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!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

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