Wacc Case Study

INTERNATIONAL CAPITAL MARKET

INDIVIDUAL ASSIGNMENT 02

Question 1. Answer.

V_T^D=dv V_T^D=600 X 1/1.14 V_T^D=600 X 0.71〖 V〗_T^D=428

V_T^u=uVV_T^u=1.14 X 600V_T^u=840

E_LT^u=V_T^u-XE_T^u=840-450〖 E〗_T^u=390 δ=(V_T^u- V_T^D)/(E_LT^u- E_LT^d ) δ=(840- 428 )/(390- 0) δ=(412 )/390=1.05641 If our equity value is less than debt so it’s more than our equity is more risky. We get E_(L=) 217.99 is less than our debt X= 450, so in this situation firm equity are more risky.

Questions 2. Answer.

CAPM and WACC has strong relationship, in camp we calculate we need cost of equity which important for calculations of WACC. Without camp its not possible and WACC. In CAPM we calculate risk free, market risk and beta. WACC is discounting approach, for this calculation we need to calculate CAPM first.

CAPM is pricing Model while WACC is discounting method, but in capital structure these two techniques is connected with each at same time.

Question 3. Answer

Fist we need to find weight of equity and weight of debt. We have figure above

Weight of Equity= E/((E+D))

At stage our value of expected return and standard deviation is showing positive sign of investment.

Question 6.

In portfolios CML(Capital Market Line) represent the allocation of capital between risky security and risk free security for all investors. CML measure risk through standard deviation. While SML (Security market line) which is trades off between expected security risk beta and expected return. SML graph represent risk beta on X-axis and expected return of Y-Axis. For portfolio analysis SML and CML show require information correct and effective. CML define risk or return for efficient portfolio, while SML define on individual