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linda_us, Master's Degree

Category: Single Problem

Satisfied Customers: 787

Experience: A tutor for Business, Finance, Accounts and other related topics.

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Are you available to help me out with two calculations? I

Customer Question

Hi *****, Are you available to help me out with two calculations? I need the cost of debt financing and the cost of equity financing computed using the following formulas: - Cost of debt = Annual Interest Payment / Market Value of Debt - Cost of Equity formula = rE = rf + β(rM - rf) where rf = the 'Risk Free' rate of return β = the firm's 'Beta'; the correlation between the firm's returns and the market rM = the historical "Market" return

I wish I knew the answer to that one. I am not really familiar with formulas such as though, however I could work it out without the formulas with added information. Would that work for you?

Yes! For sure! I am sure you can find another expert to help you with this question. Please do feel to request me again for other work that you have that I can help you with and thank you for requesting me.

This is what I have as of right now: - Cost of debt = Annual Interest Payment / Market Value of Debt Annual interest payment = $139M Market Value of debt = E((1-(1/(1+R)^Y))/R+T/(1+R)^Y E=annual interest expense = $139M R=cost of debt = 7% T=Total debt = $4,796M Y=Average maturity in yrs = ???? - Cost of Equity formula = rE = rf + β(rM - rf) where rf = the 'Risk Free' rate of return = 12.39% β = the firm's 'Beta'; the correlation between the firm's returns and the market = 1.55 rM = the historical "Market" return = 10.6%I'm not sure if all of this is correct though

There is something strange in the data you have provided (the risk free rate of return is higher than historical market return. This could be correct, but usually the risk free rate is much lower than market return). The Cost of Debt needs to be calculated on an After-tax basis so it would be better if you provide me with the full original problem so that I can check whether your calculations are correct and then tell you how to apply the formulas you have posted