Find oililys wacc under each of the given scenarios

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Reference no: EM13871638

Find Oilily's WACC under each of the following scenarios:

a. Oilily has a market value debt-to-value ratio of 40 percent. Oilily's pretax borrowing cost on new long-term debt in France is 7 percent. Oilily's beta relative to the French stock market is 1.4. The risk-free rate in France is 5 percent and the market risk premium over the risk-free rate is 6 percent. Interest is deductible in France at the marginal corporate income tax rate of 33 percent. What is Oilily's WACC in the French market?

b. Oilily can borrow in the Europound market at a pretax cost of 6 percent. International investors will tolerate a 50 percent debt-to-value mix. With a 50 percent debt-to-value ratio, the beta of Oilily is 1.2 against the MSCI world index. The required return on the world market portfolio is 12 percent. What is Oilily's WACC under these circumstances?

c. Suppose Oilily is expected to generate after-tax operating cash flow of CF1 = 10 million in the coming year and that this is expected to grow at 4 percent in perpetuity. The valuation equation V0 = CF1/(i - g) can value Oilily's cash flow stream given CF1 is the coming year's cash flow, i is the WACC, and g is the growth rate of annual cash flow. Find the value of Oilily using the WACCs from the scenarios in parts a and b.

Reference no: EM13871638

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