FIN 620 Session 2 Homework Assignment Answers

# FIN 620 Session 2 Homework Assignment Answers - equity so f...

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FIN 620 Session 2 Homework Assignment Answers: Session 2: Do problems 13-8, 13-12, and 13-16 13-8. Here we need to use the debt-equity ratio to calculate the WACC. Doing so, we find: WACC = .17(1/1.45) + .10(.45/1.45)(1 – .35) = .1374 or 13.74% 13-12. a. Using the equation to calculate WACC, we find: WACC = .112 = (1/1.65)(.15) + (.65/1.65)(1 – .35)R D R D = .0824 or 8.24% b. Using the equation to calculate WACC, we find: WACC = .112 = (1/1.65)R E + (.65/1.65)(.064) R E = .1432 or 14.32% 13-16. a. He should look at the weighted average flotation cost, not just the debt cost. b. The weighted average flotation cost is the weighted average of the flotation costs for debt and
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Unformatted text preview: equity, so: f T = .05(.75/1.75) + .08(1/1.75) = .0671 or 6.71% c. The total cost of the equipment including flotation costs is: Amount raised(1 – .0671) = \$20,000,000 Amount raised = \$20,000,000/(1 – .0671) = \$21,439,510 Even if the specific funds are actually being raised completely from debt, the flotation costs, and hence true investment cost, should be valued as if the firm’s target capital structure is used. Sources: http://www.mhhe.com/rwj http://tychousa.umuc.edu...
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