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Sorry to bother again.
I would like to know if there are any examples for these assumptions?
– The risk of the new project will be identical to the average risk of the existing company;
– the new project will not cause the company’s optimal capital structure to change;
– the systematic risk (Beta), the risk free rate and the expected return on the market portfolio will remain constant over the life of the project;
– the cost of new funds will remain the same as the existing costs.Cost of capital on the assumption that investors can remove all unsystematic risk by diversification.
-Systematic risk of TLC Ltd’s equity is 0.80;
– risk free rate is 10%;
– expected rate of return is 15%;
– the sources of funds used by TLC Ltd and their respective market values:
Source of funds Market Value($m)
Debt(par value $100) 1
Equity 3
– Interest rate on debt is 11% paid annually. The debt which is due to mature in 8 years time, has a current market price of $111.
– The company tax rate is 30%.Based on the information given and wacc: 12.08%
If you want an answer from me, then you need to post in the Ask the Tutor Forum.
However what you write does not really make sense. If you understand how the WACC is calculated, then it should be clear that it will change – unless we make the assumptions listed.
It is not a question of giving examples for assumptions – that does not make sense.
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