Cost of Capital - Solutions5

# Cost of Capital - Solutions5 - N = 18 PV =-1,120 PMT = 75...

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Old Exam Questions - Cost of Capital - Solutions Page 14 of 42 Pages N = 18, PV = -1,120, PMT = 75, FV = 1000, Solve for I/YR = K D = 6.36145% Determine the firm's costs of equity: K S = K RF + (RP M )( β ) = 3% + (5%)1.2 = 9% Step 2: Given the firm's component costs of capital, calculate the firm's WACC: WACC = W D K D (1 - T) + W S K S = (0.4)(6.36145%)(1 - 0.4) + (0.6)(9%) = 1.53% + 5.4% = 6.93% 14. Your firm has estimated that it will spend \$8 million on new capital budgeting projects during the coming year. You have been asked to calculate the appropriate cost of capital to be used to analyze these projects and have collected the following information: Your firm’s targeted capital structure consists of 40 percent debt and 60 percent common equity. Your firm expects to add \$3.0 million to retained earnings over the coming year that can be used to support the \$8 million in new projects. The company has corporate bonds outstanding with a 7 percent annual coupon that are trading at par. New debt can be issued as a private placement (no flotation expense) and will have the same level of risk as the firm’s current debt. The company’s tax rate is 40 percent. The risk-free rate is 2 percent.

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## This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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Cost of Capital - Solutions5 - N = 18 PV =-1,120 PMT = 75...

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