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Unformatted text preview: r s = $3.50/$36 + 6% = 15.72%. b. WACC: Aftertax Weighted Component Weight × Cost = Cost Debt [0.10(1 – T)] 0.15 7.00% 1.05% Preferred stock 0.10 10.20 1.02 Common stock 0.75 15.72 11 .79 WACC= 13.86 % c. Projects 1 and 2 will be accepted since their rates of return exceed the WACC. 1020 a. Aftertax cost of new debt: r d (1 – T) = 0.09(1 – 0.4) = 5.4%. Cost of common equity: Calculate g as follows: With a financial calculator, input N = 9, PV = 3.90, PMT = 0, FV = 7.80, and then solve for I/YR = g = 8.01% ≈ 8%. r s = 1 P D + g = 00 . 65 $ ) 80 . 7 )($ 55 . ( + 0.08 = 00 . 65 $ 29 . 4 $ + 0.08 = 0.146 = 14.6%. b. WACC calculation: Aftertax Weighted Component Weight × Cost = Cost Debt [0.09(1 – T)] 0.40 5.4% 2.16% Common equity (RE) 0.60 14.6 8 .76 WACC= 10.92 %...
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This note was uploaded on 03/02/2011 for the course BMGT 340 taught by Professor White during the Spring '08 term at Maryland.
 Spring '08
 WHITE
 Finance

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