Scribd
Upload
42 views

Tutorial 7 - Cost of Debt + WACC

The document provides information on 10 tutorial questions related to calculating the weighted average cost of capital (WACC). The questions provide financial information such as capital structures, costs of debt and equity, bond prices and yields, tax rates, and risk factors to calculate WACCs for various companies. The last question asks what the total capital budget should be for 7 projects with varying risk levels based on adjusting the WACC by specified risk factors.

Uploaded by

Amy Limna
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
42 views

Tutorial 7 - Cost of Debt + WACC

The document provides information on 10 tutorial questions related to calculating the weighted average cost of capital (WACC). The questions provide financial information such as capital structures, costs of debt and equity, bond prices and yields, tax rates, and risk factors to calculate WACCs for various companies. The last question asks what the total capital budget should be for 7 projects with varying risk levels based on adjusting the WACC by specified risk factors.

Uploaded by

Amy Limna
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

BF3326 – Corporate Finance

Tutorial Questions
Cost of Debt & WACC

Answer ALL Questions

1. The accountant of Bersih Bhd has provided the following information to you, target capital structure
is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of
preferred is 7.50%, and the cost of common equity is 12.75%. What is its WACC?

2. Rahsia Ltd has sold a noncallable bond several years ago that now has 20 years to maturity. This bond
has a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000.
If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation?

3. Several years ago, WonderSole Ltd sold a $1,000 par value, noncallable bond that now has 20 years
to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $925,
and the company’s tax rate is 40%. What is the component cost of debt for use in the WACC
calculation?

4. EnZyme Pty Ltd has target capital structure of 35% debt, 10% preferred, and 55% common equity.
The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of equity is 11.25%,
and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley's WACC?

5. CleanSlate plans to issue a $1,000 par value, 20-year noncallable bond with a 7.00% annual coupon,
paid semiannually. The company's marginal tax rate is 40.00%, but the government is considering a
change in the corporate tax rate to 30.00%. By how much would the component cost of debt used to
calculate the WACC change if the new tax rate was adopted?

6. EverydayCleaning’s balance sheet shows a total of noncallable $45 million long-term debt with a
coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a market value of $50
million. The balance sheet also shows that the company has 10 million shares of common stock, and
the book value of the common equity (common stock plus retained earnings) is $65 million. The
current stock price is $22.50 per share; stockholders' required return, rs, is 14.00%; and the firm's tax
rate is 40%. The CFO thinks the WACC should be based on market value weights, but the president
thinks book weights are more appropriate. What is the difference between these two WACCs?

7. Sweet Beverages Ltd balance sheet shows a total of $25 million long-term debt with a coupon rate of
8.50%. The yield to maturity on this debt is 8.00%, and the debt has a total current market value of
$27 million. The balance sheet also shows that the company has 10 million shares of stock, and the
stock has a book value per share of $5.00. The current stock price is $20.00 per share, and
stockholders' required rate of return, rs, is 12.25%. The company recently decided that its target
capital structure should have 35% debt, with the balance being common equity. The tax rate is 40%.
Calculate WACCs based on book, market, and target capital structures, and then find the sum of these
three WACCs.

1|Page
BF3326 – Corporate Finance
Tutorial Questions
Cost of Debt & WACC

8. EzyGo Ltd recently seek your professional opinion to estimate the company’s WACC. In the course of
finding out the company’s WACC you have been able to obtain the following information.

a. The firm's noncallable bonds mature in 20 years, have an 8.00% annual coupon, a par value of
$1,000, and a market price of $1,050.00.
b. The company’s tax rate is 40%.
c. The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock’s beta is 1.20.
d. The target capital structure consists of 35% debt and the balance is common equity.

The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any new
common stock. What is its WACC?

9. Chase Anthorne is the financial manager of LuckyCharm Inc., and he provided the following data:

a. The yield on the company’s outstanding bonds is 7.75%


b. Its tax rate is 40%.
c. The next expected dividend is $0.65 a share.
d. The dividend is expected to grow at a constant rate of 6.00% a year.
e. The price of the stock is $15.00 per share, the flotation cost for selling new shares is F = 10%.
f. The target capital structure is 45% debt and 55% common equity.

What is the firm's WACC, assuming it must issue new stock to finance its capital budget?

10. Joyful Enterprises, which is debt-free and finances only with equity from retained earnings, is
considering 7 equal sized capital budgeting projects. Its CFO consulted you to assist in deciding whether
none, some, or all of the projects should be accepted. You have the following information: rRF = 4.50%;
RPM = 5.50%; and b = 0.92. The company adds or subtracts a specified percentage to the corporate
WACC when it evaluates projects that have above- or below-average risk. Data on the 7 projects are
shown below. If these are the only projects under consideration, how large should the capital budget
be?

Risk Expected Cost


Project Risk Factor Return (Millions)
1 Very low -2.00% 7.60% $25.0
2 Low -1.00% 9.15% $25.0
3 Average 0.00% 10.10% $25.0
4 High 1.00% 10.40% $25.0
5 Very high 2.00% 10.80% $25.0
6 Very high 2.00% 10.90% $25.0
7 Very high 2.00% 13.00% $25.0

2|Page

You might also like