Ecana Firm Cost of Capital Essay

1 ) Formula to get cost of capital:

WACC sama dengan wdrd(1-T) & wpsrps & wsrs

The price of capital is very important to determine for any organization that is making a decision on acknowledging or rejecting a project. If the expected charge of come back on a task exceeds the calculated expense of capital, then this company will need to move forward while using project. The price of capital is specially important for Encana because they are seeking to grow in size. Calculating the WACC will probably be necessary for utilization in their capital budgeting strategy. 2 . Following tax expense of debt:

Using the market value approach, the first step is to determine the mandatory rate of return debt holders need. As mentioned, the price of capital can be used in capital budgeting and so i used just long term debt for establishing WACC. Also, the YTM that current bondholders anticipate is given, that can be a good approximate as to what the new bondholders will need: rd = 5. 81%

Tax price = tax expense as well as E. M. T. sama dengan 1, 260/4, 089= 35. 81% After tax expense of debt = rd (1-T) = your five. 81 (1-30. 81%) = 4. 02% 3. Cost of preferred share:

It was pointed out in the text message that " Encana does not have preferred stocks outstanding”. Thus calculating this kind of portion of WACC is not necessary. 4. Cost of Equity:

Using the CAPM strategy, the first thing to perform is estimate the risk free rate. We are able to use the permanent treasury a genuine to do this: rRF = four. 2% It will now be essential to estimate the existing market risk premium. My spouse and i used the S& G arithmetic common return in Exhibit your five minus the risk-free rate (RPm= rm- r*) 13. 9 – 4. 2 = 9. 7% The share Beta is given: 1 . twenty seven

Rs= rRF + (RPm) Beta=4. 2% + (9. 7%) 5. 1 . 7=16. 52%

DCF Approach:

Calculate g applying retention development model:

G = ROE (retention ratio) & preservation ratio = 1- Payout ratio |Year |Closing Price |EPS |DPS |Payout |ROE | |2002 |23. 88 |1. 44 |0. two |0. 1389 |0. 0603 |...

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