Sample Problems for WACC
Question 1:
Suppose a company uses only debt and internal equity to nance its
capital budget and uses CAPM to compute its cost of equity. Company
estimates that its WACC is 12%. The capital structure is 75% debt and 25%
internal e
ECO 4368
Instructor: Saltuk Ozerturk
Capital Budget: B
Net Earnings: I
Dividend Payout Ratio: x
Target Capital Structure
wd% debt and we% equity
External equity
Internal equity
If retained earnings are greater than the size of the capital budget to
be n
1
Optimal Portfolio with One Risky and One
Safe Asset
Consider an investor with an initial wealth w0 : The investor has mean-variance
preferences over his nal wealth w and wants to maximize
AV ar(w)
2
U = E (w)
There are two assets. A risky asset has a sh