I understand that many of these problems can be done in excel, I need the formulas and calculations that would be used on a calculator to help me understand how to solve the problem myself.
1. The market value of your firm's equity is $500 million, which is also the value of your total debt. Your cost of debt (rd) is 6% and your cost of equity is (re) is 10%. What is your weighted average cost of capital (WACC) if your tax rate is 40%?
2. Crone Industries is planning its operations for next year, and Ronnie Crone, the CEO, wants you to forecast the firm's additional funds needed (AFN). Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions.
Last year's sales = S0
Last year's accounts payable
Sales growth rate = g
Last year's notes payable (to bank)
Last year's total assets = A0
Last year's accruals
Last year's profit margin = M
Target payout ratio
3. You invest $50,000 in George's House Painting, Inc, borrowing $30,000 of the money at 9%. If you expect to earn a 20% return on your investment under this arrangement, what would you expect to earn on a % basis, if you put up the entire $50,000 from your own money? Assume no taxes.
1. WACC = Proportion of debt X after tax cost of debt + Proportion of equity X cost of equity
Value of equity = 500
Value of debt = same as value of debt = 500
Total capital = 1,000
Proportion of debt = 500/1,000=50%
Proportion of equity = 500/1,000= 50%
After tax cost of debt = cost of debt X (1-tax rate) ...
The solution explains some finance questions relating to weighted average cost of capital, additional funds needed and rate of return