Calculating WACC to Assess Projects
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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?
9.33%
9.67%
9.90%
9.56%
8.99%
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?
9.65%
10.43%
9.89%
10.49%
9.97%
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Solution Summary
Solution describes the steps to calculate WACC in the given cases, attached in Excel with calculations displayed.
Solution Preview
Please refer attached file for better clarity of calculations.
1.
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%
WACC=wd*rd*(1-T)+wp*rp+wc*rc=35%*9.5%*(1-40%)+5%*8%+60%*12.5%=9.90%
Expected return on average risk projects should be above 9.90%
Expected return on low risk projects should be above ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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