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Calculating WACC to Assess Projects

1. Howard Industries has a target capital structure consisting of 35% debt, 5% preferred stock, and 60% common equity. The-tax YTM on Howard's long term bonds is 9.5% it cost of preferred stock is 8% and its cost of retained earnings is 12.5%. If the firm's 40% what is Howard's WACC if it doesn't have to issue new common stock?


If they undertake a variety of projects with different levels of risk. Howard adds 2 percentage points to its WACC for high-risk projects and subtracts 2 percentage points from its WACC for low-risk projects.

Which projects should Howard Industries accept check all that should be accepted?

Project Expected rate of return risk accept project
A 10.7% High
B 10.4% Average
C 12.7% High
D 8.5% Low
E 8.6% Average
F 6.7 % Low
G 9.1% Low
H 10.8% Average

2. Capital Structure weights

Frank Inc has the following abridge balance sheet:

Current Assets $3,600 Debt $5,200
Preferred stock $ 600
Fixed assets $6,400 Common Equity $ 4,200
Total assets $10,000 Total liabilities and equity $10,000

The market value of Franks' debt preferred stock and common equity its book value. Frank's cost of debt is 10% cost of preferred stock is 7.7% and its costs of common equity are 15%. If Frank's tax rate is 30% what is the firm's WACC?


Solution Preview

Please refer attached file for better clarity of calculations.

Weight of debt=wd=35%
Cost of debt=rd=9.50%
Tax Rate=T=40.00%

Weight of prefered stock=wp=5%
Cost of prefered stock=rp=8%

Weight of common equity=wc=60%
Cost of equity=rc=12.50%


Expected return on average risk projects should be above 9.90%
Expected return on low risk projects should be above ...

Solution Summary

Solution describes the steps to calculate WACC in the given cases, attached in Excel with calculations displayed.