Question

Kristian Thalen has just joined the corporate treasury group at Electrolux of Sweden, a multinational Swedish appliance maker. Electrolux is considering making an offer for GE’s appliance business and wants to revise its weighted average cost of capital for its analysis in its home currency, the Swedish kroner (SEK). Kristian has been assigned the task. Using the following assumptions, he goes step by step through the following questions.Component ValueSwedish kroner government bond yield (10-year) 4.30%Electrolux credit risk premium 1.20%Swedish corporate income tax rate 26.00%Electrolux beta 1.30Swedish equity market risk premium 4.00%Electrolux shares outstanding 286,130,000Electrolux share price SEK 182.00Electrolux debt outstanding SEK 11,532,000,000Required:A) What is Electrolux’s cost of debt, after-tax, in SEK?B) What is Electrolux’s cost of equity in SEK?C) What is Electrolux’s market capitalization?D) What is Electrolux’s total value of equity outstanding?E) What proportion of Electrolux; s capital structure is debt?F) What proportion of Electrolux’s capital structure is equity?G) What is Electrolux’s weighted average cost of capital?

Answer 1

Answer:

See explaination

Explanation:

cost of debt, after-tax = (4.3% + 1.2%)*(1 - 26%) = 4.07%

cost of equity = 4.3% + 1.3*4% = 9.5%

market capitalization = 286130000 * 182 = 52075660000

total value of equity outstanding = market capitalization = 52075660000

Debt portion = 11532000000 / (11532000000 + 52075660000) = 0.18

Equity portion = 1 - 0.18 = 0.82

weighted average cost of capital = 0.18*4.07% + 0.82*9.5% = 8.52%