Cost of capital
Income statement for XYX Inc. for the most recent financial year is presented below (in million EUR): EBIT 130 Interest expense 30 Earnings before taxes (EBT) 100 Taxes 25 Net income 75 The company has 10 million shares outstanding. The shares are currently trading at the level of P/E (price earnings ratio) = 12 times. The company has released the following forecasts: 80% of net income will be paid out as dividends in the future. Expected (long-term) growth rate of both net income and dividends is 3% annually. The company also uses bank financing quite extensively. The level of debt has been quite stable recently and has remained at the level of 600 million EUR for quite some time. The company is going to issue new debt if necessary in order to maintain the current level of leverage.
Questions:
a) Find the cost of equity and debt
b) Find the market value weights for both sources of capital
c) Calculate the after-tax cost of capital (WACC) and explain briefly what does this result mean?