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Calculating equity required return and weighted average cost of capital

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Calculate the Equity Required Return, Ke
Calculate the Weighted Average Cost of Capital, WACC
Using the WACC calculated in the previous step, compute the project's Net Present Value, NPV, given the Cash Flows in the DATA sheet, and determine if the project should be accepted or rejected for the HI TECH Alternative
Using the WACC calculated in the previous step, compute the project's Net Present Value, NPV, given the Cash Flows in the DATA sheet, and determine if the project should be accepted or rejected for the DISTRIBUTOR Alternative
Using the WACC calculated in the previous step, compute the project's Net Present Value, NPV, given the Cash Flows in the DATA sheet, and determine if the project should be accepted or rejected for the CURRENT Alternative
Compute the project's Internal Rate of Return, IRR, and determine if the project should be accepted or rejected for the HI TECH Alternative
Compute the project's Internal Rate of Return, IRR, and determine if the project should be accepted or rejected for the DISTRIBUTOR Alternative
Compute the project's Internal Rate of Return, IRR, and determine if the project should be accepted or rejected for the CURRENT Alternative
Determine the best alternative among HI TECH, DISTRIBUTOR, and CURRENT, based on NPV criterion
Determine the best alternative among HI TECH, DISTRIBUTOR, and CURRENT, based on IRR criterion
Discuss the strengths and weaknesses of the NPV technique
Discuss the strengths and weaknesses of the IRR technique
Discuss the strengths and weaknesses of the Payback technique
Why could the NPV and IRR techniques produce conflicting results (one tells you to accept the project while the other tells you to reject the project)?
Discuss the concept of Capital Rationing for capital budgeting

HI TECH DISTRIBUTOR CURRENT

YEAR CASH FLOW

0 ($5,408,435) ($5,800,977) ($5,069,546)
1 $1,035,000 $931,500 $1,138,500
2 $1,107,450 $1,218,195 $996,705
3 $1,356,674 $1,221,006 $1,492,341
4 $1,553,256 $1,708,582 $1,537,723
5 $2,036,002 $1,832,401 $2,217,206

DEBT PERCENTAGE 32%
EQUITY PERCENTAGE 69% .

EQUITY BETA 0.74
RISK FREE RATE 3
MARKET RATE 7

TAX RATE 30%
AVERAGE BEFORE TAX COST OF DEBT 9%.

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The solution assists with calculating equity required return and weighted average cost of capital.

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Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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