Electrolux of Sweden. Kristian Thalen has just joined the corporate treasury gro
ID: 2786261 • Letter: E
Question
Electrolux of Sweden. 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
Value
Swedish kroner government bond yield (10-year)
4.30%
Electrolux credit risk premium
1.20%
Swedish corporate income tax rate
26.00%
Electrolux beta
1.30
Swedish equity market risk premium
4.00%
Electrolux shares outstanding
286,130,000
Electrolux share price
SEK 182.00
Electrolux debt outstanding
SEK 11,532,000,000
What is Electrolux’s cost of debt, after-tax, in SEK?
What is Electrolux’s cost of equity in SEK?
What is Electrolux’s market capitalization?
What is Electrolux’s total value of equity outstanding?
What proportion of Electrolux; s capital structure is debt?
What proportion of Electrolux’s capital structure is equity?
What is Electrolux’s weighted average cost of capital?
Component
Value
Swedish kroner government bond yield (10-year)
4.30%
Electrolux credit risk premium
1.20%
Swedish corporate income tax rate
26.00%
Electrolux beta
1.30
Swedish equity market risk premium
4.00%
Electrolux shares outstanding
286,130,000
Electrolux share price
SEK 182.00
Electrolux debt outstanding
SEK 11,532,000,000
Explanation / Answer
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%
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