Cost of Capital - Solutions10

# Cost of Capital - Solutions10 - Determine new rS =...

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Old Exam Questions - Cost of Capital - Solutions Page 31 of 42 Pages Determine new r S = 4.0% + (5.0%)*(1.48) = 11.40% Calculate new WACC: WACC = (r D )(1-T)(r D ) + (r S )(r S ) WACC = (.06)(1-.4)(.50) + (.114)(.50) = 0.018 + 0.057 = 7.50% 41. Assume that a firm takes on a project that requires an initial investment in Year 0 of \$50,000. Also assume that the firm raised the \$50,000 by issuing \$10,000 of debt at a before-tax cost of debt of 8%, and issued \$40,000 of equity at a cost of equity of 15%. Given this information, and assuming that the tax rate is 40%, determine the weighted average cost of capital (WACC) for this project. A. 11.44% B. 11.98% * C. 12.96% D. 12.48% E. 10.92% WACC = (.08)(1-.4)(20%) + (.15)(80%) = .0096 + .12 = 12.96% 42. Assume that your firm has estimated that it will spend \$20 million on new capital budgeting projects during the coming year and that you have been asked to calculate the appropriate cost of capital to be used to analyze these projects. You 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 \$5.0 million to retained earnings over the coming year that can be used to support the \$20 million in new projects. The company has corporate bonds outstanding with an 8 percent annual coupon that

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Cost of Capital - Solutions10 - Determine new rS =...

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