Purchase Solution

WACC

Not what you're looking for?

Ask Custom Question

McCoy, Inc., has equity with a market value of $40 million and debt with a market value of $20 million.

The cost of the debt is 6% semi-annually.
Treasury bills that mature in one year yield 5%t per annum,
and the expected return on the market portfolio over the next year is 15%.
The beta of McCoy's equity is 0.8 . The firm pays no taxes.

a. What is McCoy's debt-equity ratio?

b. What is the firm's weighted average cost of capital?

c. What is the cost of capital for an otherwise identical all-equity firm?

Purchase this Solution
Solution Summary

The solution explains the calculation of debt to equity ratio, WACC and cost of capital for an all equity firm.

Solution Preview

1. Market Value of Debt=$20 million, Market Value of Equity=$40 million, so
Debt/Equity = 20/40=0.5

2. Because you are given an equity beta (i.e., unlevered) you have to lever it to get the proper data to compute the WACC. To lever up the beta, use the following formula:
BL = BU * (1+(1-t)(d/e)).
where BL=Beta ...

Purchase this Solution
Free BrainMass Quizzes
Organizational Leadership Quiz

This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.

Learning Lean

This quiz will help you understand the basic concepts of Lean.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

View More Free Quizzes
Related BrainMass Solutions

  • Multiple choice

    The project's IRR increasess as the WACC declines. The project's NPV increases as the WACC declines.

  • MCQ on capital budgeting

    MIRR is calculated by investing the intermediate cash flows at project's WACC. Therefore, MIRR is affected by WACC. Payback period does not use any discount rate; hence WACC has no role to play in the calculation of WACC.

  • WACC Explanation and analysis

    433532 WACC Explanation and analysis See attached file. Provided to you are 2 rounds of separate WACC analysis. Please provide an explanation of the WACC results and compare the rounds to each other. Are the WACC results a positive outcome?

  • What is meant by Weighted Average Cost of Capital (WACC)?

    209965 Weighted Average Cost of Capital (WACC) Definition a. What is meant by Weighted Average Cost of Capital (WACC)? b. What are the components of WACC? c. Why is WACC a more appropriate discount rate when doing capital budgeting? d.

  • Last month, Lloyd's Systems analyzed the project whose cash

    A financial calculator would be the simplest: NPV = CF0+CF1/(1+WACC)^1+CF2/(1+WACC)^2+CF3/(1+WACC)^3 Old WACC = 10%, NPV = -1000+410/(1+10%)^1+410/(1+10%)^2+410/(1+10%)^3 = $19.61 WACC = 11.25% New NPV = -1000+410/(1+11.25%)^1+410/(1+11.25%

  • Weighted Average Cost of Capital

    Situation 1 - Equity 50%, Preferred Stock 25% & Debt 25% WACC = 50%*14 + 25%*6 + 25%*8*(1-0.35) WACC = 7% + 1.5% + 1.3% WACC = 9.8% Situation 2 - Equity 60%, Preferred Stock 20% & Debt 20% WACC = 60%*14 + 20%*6 + 20%*8*(1-0.35) WACC = 8.4%

  • WACC

    129892 WACC The general rule for using the weighted average cost of capital in capital budgeting decisions is accept all projects with rates of return greater or equal to the WACC, less than the WACC, equal to or less than the WACC or positive rates of

  • cost of common stock that you would use in the WACC formula

    WACC Formula Describe how you would calculate the cost of common stock that you would use in the WACC formula? How are the weights derived that are used in the WACC formula?

  • WACC from the asset structure for McCabe Interests

    WACC = 14.25% The solution estimates WACC from the asset structure for McCabe Interests.

  • Weighted Average Cost of Capital (WACC)

    WACC = 10.60% The solution computes wacc with the given information.

View More Related Solutions