2.1 APN Outdoors Current Capital Structure
The current capital structure can be analyzed from the Debt to Equity Ratios. In 2016, we found that the company was financed using Debt of $102,677,000 and Equity of $ 269,199,000. Therefore the capital structure in 2016 was 28% debt and 72% equity.
2.2 APN Outdoors Weighted Average Cost of Capital
The components of the WACC are as follows
• Cost of equity
• Cost of debt
• Corporate tax rate
• Weight of Equity
• Weight of Debt
1. Cost of Equity
The cost of equity, Re can be determined from Capital Asset Pricing Model
Re = rf +β(rm –rf)
Where rf = Risk free rate, β= Beta, (rm –rf)= Risk premium
The cost of equity for APN Outdoor is calculated as 8.38%
2. Cost of Debt
To calculate the cost of debt we need to divide the total debt by the interest expense. We get the cost of debt for APN Outdoor as 2.77%.
3.
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Corporate Tax
As per their 2016 financial statements, we can assume the applicable corporate tax rate applicable to the company is 30%.
4. Weigh of Debt and Equity
To determine the Weights of Equity and Debt, we require the market value of Equity (E) and the book value of Debt (D).
The market value of Equity is the current share price, P0, multiplied by the number of shares outstanding. These data is available from Yahoo! Finance (Yahoo Finance, 2017). In 2016, E was $753,122,400
The 2016 book value of Debt (D) can be obtained from the Balance Sheet. In 2016, D was $102,677,000.
Weight of Debt, Wd= D/D+E = 12%
Weight of Debt, We= E/D+E = 88%
5. Weighted Average Cost of Capital
In order to determine the optimal capital structure of APN, we need to determine APN Outdoor’s Weighted Average Cost of Capital.
WACC =Weight Debt * cost of debt *(1 – T) + Weight equity *cost of