Yield on government debts, which is also referred to risk-free investment bonds and yield is not fixed rate. It varies with the type of guilt securities throughout the time. Yield on the government debts increased with the increment of the time period of the investment made. The average rate that could be used for calculating the yield on government debts is 1.75 %. 2.1 Using the historical market risk premium, what is the cost of equity for Harvey Norman using the CAPM? Cost of Equity = Risk-free rate of return + Beta * (Expected Return of market – Risk-Free Rate of Return) Thus Cost of Equity = 1.75% + .7465 * 4.5% = 5.11% 2.2 Calculation of Cost of debts To determine the actual cost of debt we take the different average of debts and interest …show more content…
Bob has used pure play approach to make complete level of valuation of its share prices and cost of debts of the company. There are following problems which are taken into consideration while taking Harvey Norman as a representative company. Harvey Norman is a listed company which is engaged in electronic business while at the same time HCL is a listed company therefore data used in the calculation might be misleading for the complete level of interpretation of data. Unlisted company cannot be compared with the listed companies as there are various rules and regulation to follow which put sector cap on the functioning of the company. Costs of capital are the average cost of all equity and debts of the company. Harvey Norman is having various long term debts and borrowings at market value and book values. Market value amount is used in the balance sheet and book value is used in the notes of account therefore this two set of values has resulted into mist of calculating cost of capital for the HCL. Harvey Norman is a listed company and information collected from the annual report is price sensitive