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# weighted average cost

1. A firm with a corporate-'wide debt/equity ratio of 33%, an afterâ?'tax cost of debt of 7%, and a cost of equity capital of 15% is interested in pursuing a foreign project. The debt capacity of the project is the same as for the company as a whole, but its systematic risk is such that the required return on equity is estimated to be about 12%. The after-tax cost of debt is expected to remain at 7%.
What is the project's weighted average cost of capital?
How does it compare with the parent's WACC?

2. Given exchange rate changes over the past few months, how would you revise cash-flow projections for a planned (manufacturing plant) project in Germany?
How would the nature of the project - export oriented versus producing for domestic market - affect your revised cash flows?

#### Solution Preview

1. A firm with a corporate wide debt/equity ratio of 33%, an after tax cost of debt of 7%, and a cost of equity capital of 15% is interested in pursuing a foreign project. The debt capacity of the project is the same as for the company as a whole, but its systematic risk is such that the required return on equity is estimated to be about 12%. The after tax cost of debt is expected to remain at 7%.

What is the project's weighted average cost of capital?
WACC = E / V * Re + D / V * Rd * (1 - Tc)

Where E is equity value, D is debt value, V is the sum of debt and equity, Re is cost of equity, Rd is cost of debt, and ...

#### Solution Summary

Weighted average costs are examined.

\$2.19