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Hi Sir,
Under question number 4, i was confused why we used the cost of capital of 13% as the shareholder’s required return?
ANd why the solution is not 33.6/.13?
Sir, please ignore my silly solution assumption. I now get the point on that but the cost of capital of 13% which was considered as shareholder’s return much more needs clarification. Thank you.
But it is all clarified in my free lectures!
The company has to give the shareholders what they require – if shareholders want 13% then it is costing the company 13% to raise finance from shareholders.
Thanks. I remember this but i was just used with shareholders required return. Lastly to confirm my understanding, shareholders required return is the same as the cost of capital?
No. The shareholders required rate of return is the same as the cost of equity. (The cost of capital (the WACC) is calculated using both the cost or equity and the cost of debt)
Sir thank you for all these clarifications. I got it now..Im into this chapter now.
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