FINC410-PH5(IP)

Using the Apple inc, write a report of 600 words that
demonstrates your...

Question

FINC410-PH5(IP)

Using the Apple inc, write a report of 600 words that
demonstrates your understanding of the cost of capital and risk. Specifically,
you are to include the following: 
Give a description of the weighted average cost of
capital. 
Give a description of the capital asset pricing model. 
Give a description of the security market line. 
Give a description of the cost of debt. 
Calculate the weighted average cost of capital. Explain
your answer. 
Calculate the cost of debt. Explain your answer. 
How would you restructure the firm's debt? Explain your
answer. 
Please used at least 3 references.

Robert · Accepted Answer

Weighted Average Cost of Capital 
The weighted average cost of capital is the rate of return that a firm must earn on its projects in 
order to maintain the market value of its stock. It can be defined as the rate of return required by 
the suppliers of capital in order to attract funds from them. If risk is constant, then the value of 
firm will be increased by those projects which provide rate of return more than the cost of 
capital. The projects with a rate of return below the cost of capital will decrease the value of the 
firm.  
WACC = % of Debt x Cost of debt + % of equity x cost of equity + % of Preferred stock x cost 
of preferred stock. 
There are several aspects that are taken into consideration while calculating WACC, these are: 
A. Cost of Equity 
For calculating weighted average cost of capital, Cost of equity is required. Cost of 
Equity can be defined as the return that the company pays to its shareholders. It is the 
compensation demanded by the market in exchange for owning the asset and bearing the 
risk of ownership. Cost of Equity can be calculated by different methods namely, CAPM 
model, dividend growth approach.
1. Dividend Growth Model: The dividend growth model calculates the value of the stock 
on the basis of future series of dividends which grow at constant rate. This model is 
quite simple to use and is used by the mature companies.  
Ke = (D₁ / P₀) + g 
Where, 
P₀ = Current Market Price 
D₁ = Next Expected Dividends 
Ke = Cost of Equity 
G = Growth Rate 
2. Capital Asset Pricing Model: This model calculates the cost of equity on the basis of 
risk free rate and expected return. It measures the expected return on an investment 
which in turn can be compared with the required rate of return so as determine 
whether the asset is underpriced, overpriced or properly priced. The basic idea behind 
the capital asset pricing model is that investors should get a reward for both waiting 
and worrying. The greater the worry, the greater the expected return. If you invest in a 
risk-free Treasury bill,

FINC410-PH5(IP) Using the Apple inc, write a report of 600 words that demonstrates your understanding of the cost of capital and risk. Specifically, you are to include the following: Give a...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment