Diversified plc is trying to introduce an improved method of assessing investment projects using techniques. For this it has to obtain a to use as a discount rate. The finance department has assembled the following information:
– The company has an equity beta of 1.50, which may be taken as the appropriate adjustment to the average risk premium. The yield on risk-free government securities is 7 per cent and the historic premium above the risk-free rate is estimated at 5 per cent for shares.
– The market value of the firm’s equity is twice the value of its debt.
– The cost of borrowed money to the company is estimated at 12 per cent (before tax shield benefits).
– tax is 30 per cent.
Assume: No inflation.
Estimate the equity using the (CAPM). Create an estimate of the weighted average (WACC).