 # ASSIGNMENT Q 2.docx - Question 2 a Expected Cash Flows...

• 2

Course Hero uses AI to attempt to automatically extract content from documents to surface to you and others so you can study better, e.g., in search results, to enrich docs, and more. This preview shows page 1 - 2 out of 2 pages.

Question 2a)Expected Cash Flows each Year=Weighted Average of the three possible states of the economy.Probability:Good Economy = 30% / Poor Economy = 20% / Average Economy = (100-(30+20)) = 50%Expected Cash Flows:Year 1 = (350,000 x .3) + (200,000 x .5) + (180,000 x .2) = 240,000Year 2 = (300,000 x .3) + (275,000 x .5) + (225,000 x .2) = 272,500Year 3 = (400,000 x .3) + (325,000 x .5) + (270,000 x .2) = 336,500Year 4 = (320,000 x .3) + (275,000 x .5) + (250,000 x .2) = 283,500Year 5 = (250,000 x .3) + (175,000 x .5) + (150,000 x .2) = 192,500b)Discount Rate=Weighted Average Cost of CapitalThe weighted average cost of capital is the rate that a company is expected to pay on average to allits security holders to finance its assets. The WACC is commonly referred to as the firm's cost ofcapital.WACC=i=1Nri. MVii=1NMViWACC=weighted average cost of capitalN=number of sources of capital (securities, types of liabilities)ri=required rate of return for securityi=securityMVi=market value of all outstanding securitiesIn order to find Weighted Average cost of capital, we must find the return on equity (cost of equity)for the funding sources.i.Interest rate of loan =48,000x5200000– 1 = 0.2 = 20%ii.YTM = (FVP¿¿1n– 1 =(400,000250,000¿¿
End of preview. Want to read all 2 pages?

Course Hero member to access this document

Term
One
Professor
NoProfessor
Tags
Weighted average cost of capital
• • • 