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Demo Qs Topic 6 - Topic6 WACC Question1 .Thebookvalueof...

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Demonstration Lecture  Topic 6 WACC Question 1           Calculate the weighted average cost of capital for the Peach Computer Company. The book value of  Peach’s outstanding debt is $10 million. Currently, the debt is trading at 90 percent of book value and is  priced to yield 12 percent. The 1 million outstanding shares of Peach stock are selling for $20 per share.  The required return on Peach stock is 20 percent. The tax rate is 30 percent. Market Value of Equity = E = $20, , 000 000 Book Value of Debt = $10, , 000 000 Market Value of Debt = D = $9, , 000 000 Market Value of Firm = V E D = + = $29, , 000 000 r e = 020 . r d = 012 . 3 . 0 = taxrate ( 29 ( 29 % 4 . 16 000 , 000 , 29 000 , 000 , 9 3 . 0 1 12 . 0 000 , 000 , 29 000 , 000 , 20 20 . 0 1 = - + = - + = V D taxrate r V E r r d e 1
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Ques     tion 2     John Smith Ltd. recently asked a team of management consultants to determine an appropriate cut-off for  investment projects with the same risk as the firm.  Unfortunately, part of the report was lost and, as the  investment manager of Smith, you have been asked to calculate the missing figures.   Fortunately, the  following facts were available from the report. The consultants estimated that the required rate of return was 13.635% Shares were selling for $1.20. The Beta of Smith's equity was estimated at 0.7, r m  at 20% and r f  at 12%.
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