Your companys capital structure and its cost of capital

Weighted average cost of capital of is one of the most tools available for managers to use in decisions making relating to long term sustainability of the firm . It is the overall process of generating evaluating and selecting the cost of capital that will be required by an investment project . It at times acts as internal rate for projects

COMPANY NAME : HALLIBURTON BALANCE SHEET : 31 DECEMBER , 2007

MARKET VALUE DATE : 7TH JULY , 2008 . 4 .39PM ET

WEIGHTED AVERAGE COST OF CAPITAL

Source (a ) Book Value (b (In thousands ) Market Value (c (In

thousands ) Proportions (d ) Cost (e ) Weighted (f

Equity 6 ,866 ,000 42 ,750 ,000 0 .9388 11 .8408 11 .1161

Long term debt 2 ,627 ,000 2 ,627 ,000 0 .0577 3 .795 0 .2190

Short term debt 159 ,000 159 ,000 0 .0035 5 .841 0 .0204 45 ,536 ,000 1 .0000

11 .3555 Cost of equity

Rs Rf Bs (Rm - Rf

Where

Rs - cost of equity capital

Rf- the return that can be earned on a risk - free investment (e .g US treasury bill

Rm - the average return on all securities (e .g , S

500 stock index

Bs - the securities beta (systematic ) risk

It is easy to see that the required return for a given security increases with increases in it 's a beta

Application of the CAPM can be demonstrated . Assume a security with a beta of 0 .92 is being considered at a time when the risk - free rate is 4 .26 percent and the market return is expected to be 12 .5 . Substitute this data into the CAPM equation , we get

Rs 4 .26 0 .92 (12 .5 - 4 .26 4 .26 (0 .92 x 8 .24 4 .26 7 .5808 11 .8408

Cost short term debt

The rate has been assumed to be equivalent to the bank lending rates in the USA . it the rate adapted here is 8 .85

Effective after tax rate is 8 .85 (1-0 .34 5 .841

Cost long term debt

The rate has been assumed to be equivalent to convertible bonds . it the rate adapted here is 4 .75

Effective after tax rate is 5 .75 (1-0 .34 3 .795

The cost of capital that will be used by this company in evaluating capital projects is 11 .3555 . This is the weighted average cost capital It remains valid so long as the factors are kept constant as well as assumption made are maintained

It should be noted that the rate is the accepted rate . This rate is for the purpose of this assignment only REFERENCES

Biger , N (2007 , The Cost of Capital and Capital Budgeting Decision - PP presentation

Ghetti A (2008 Terrific introduction to financial management Amazon

Winger and Frasca Personal Finance An Integrated Planning Approach Pearson...