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Weighted Average Cost of Capital (WACC) for Dragon Breweries

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See attached file.

Please illustrate all calculations in the yellow table below from the Excel file. Please build the formulas in the Excel sheet.

Dragon Breweries (DB) has the following balance sheet:

Dragon Breweries ($ in millions)
Fixed assets $200,000,000 Short-term debt $20,000,000
Long-term debt $80,000,000
Equity $100,000,000
Total $200,000,000 Total $200,000,000

In addition, you obtain the following information:

·         The yield on the short-term debt is equal to the coupon of 3%.
·         The long-term debt consists of 30-year bonds that pay an annual coupon of 7% on their $1,000 face value. Similar publicly traded bonds are currently yielding 5.5%.
·         There are 5 million shares of common stock, currently trading at $30 per share. The beta is 1.2.
·         The current yield on 10-year Treasury bonds is 4%, and the expected return on the S&P 500 stock index is 9%.
·         DB pays taxes at a rate of 40%.

Compute the weighted average cost of capital for DB, using estimated market value weights. Please show all calculations in the table below (or one similar in format in Excel). Report returns and weights to 3 decimal places, e.g., 8% should be reported as 0.080.

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Solution Summary

This solution provides a detailed a computation of the given finance problem in Excel.

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COMPUTATION:

Market value
Short term $20,000,000
Long ...

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