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Return on risk-free australian government bonds

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Reference no: EM132397639

You currently work within the finance department of Aurizon Pty Ltd, a company that specialises in railway transportation. As part of your role, you are responsible for updating the Weighted Average Cost of Capital for the firm each year. Your coworkers have compiled the following information to assist you with your calculations.

  • The return on risk-free Australian Government Bonds is 2% p.a.
  • Aurizon beta is 0.8, and the market return is 8% p.a.
  • Aurizon Pty Ltd has 2 million outstanding shares, and its shares are currently trading at $5 per share. The book value of the equity is $5 million.
  • Aurizon's debt is funded by a mixture of corporate bonds, and long-term bank loans. The corporate bonds are valued at $5 million, and have a cost of debt of 5% p.a. The bank loans are valued at $15 million, and have a cost of debt of 4% p.a.
  • The company's effective tax rate is 30%. Required: Calculate the Weighted Average Cost of Capital for Aurizon under a classical tax system.

Reference no: EM132397639

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