weighted average cost of capital assignment

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  • Read Corporate Finance: Core Principles and Applications, 5th Edition by Ross/Westerfield/Jaffe/Jordan. (Chapter 12).

WACC ASSIGNMENT

Risk-free rate 0.016 Market rate 0.078 Tax rate 30%

Loan

$2,000,000

Common stock

Interest rate

0.056

Beta

1.00

7 yr, B rated bond issue

Shares outstanding

310,000

Price per bond

$1,100

Price per share

$17.50

Number issued

1,210

Use the chart above to answer questions 1-6. Refer to the ratings chart in the slides to find the yield to maturity on the bond issue.

  • What are the weights the bond issue and loans contribute to the company’s overall debt?
  • What is the after-tax weighted average cost of debt?
  • Using the CAPM, what is the required return on the company’s common stock?
  • What is the market value of the firm’s common stock?
  • What are the weights the debt and equity contribute to the company’s capital?
  • What is the weighted average cost of capital?
  • If the firm has a project with an expected return of 5%, should the firm invest in the project? Justify your answer.
 
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