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Questions involving WACC

1. (Answer using Excel) Finding the WACC: Given the following information for Huntington Power Co., find the WACC. Assume the company's tax rate is 35 percent.

Debt: 5,000 6 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 105 percent of par: the bonds make semiannual payments.

Common Stock: 175,000 shares outstanding, selling for $58 per share; the beta is 1.10.

Market: 7 percent market risk premium and 5 percent risk-free.
a. Find the WACC.

2. (Answer using Excel) Finding the WACC: Titan Mining Corporation has 9.3 million shares of common stock outstanding and 260,000 6.8 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.20, and the bonds have 20 years to maturity and sell for 104 percent of par. The market risk premium is 7 percent, T-bills are yielding 3.5 percent and Titan Mining's tax rate is 35 percent.

a. What is the firm's market value capital structure?
b. If Titan Mining is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows?

Solution Summary

The following posting helps with questions involving WACC. Concepts covered include market risk premiums, bonds outstanding and market value capital structure.

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