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    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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    https://brainmass.com/business/weighted-average-cost-of-capital/calculating-wacc-to-assess-projects-432323

    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 ...

    Solution Summary

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

    $2.19

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