Suppose you are a financial manager at the company of your analysis reporting to the Chief Financial Officer (CFO). The CFO asked you to estimate the companys cost of capital measured by the weighted average cost of capital (WACC) based on the Capital Asset Pricing Model. The cost of capital you estimate will be used as the basis of a new 5-year management plan which will be announced by the chief executive officer (CEO) at an investor relations meeting held at the companys primary stock exchange early next year.
The location of the primary stock exchange should set the currency, the risk-free rate benchmark and the risk premium proxy for your estimation. The CFO asked you for an estimate of the levered cost of capital and the unlevered cost of capital of your firm. The CFO would also like to see an estimate of the unlevered cost of capital of two or more peer companies for reference.
Write up a report of no more than 2,000 words articulating how you estimated the cost of capital. Assume that your report will be examined by the CEO and the CFO: They aim to gain shareholders support that your companys estimate of the cost of capital is fair. It is important to show in your report that your analysis of your firms cost of capital is based on financial theories, real market data and common practices (therefore little room for bias). You may attach to your essay an Appendix containing tables and figures to back up your discussion. There is no word limit for the Appendix.
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