Explore BrainMass
Share

# Weighted Average Cost of Capital (WACC)

### Cost of Equity and WACC: Example Problems

XYZ Corporation's present capital structure, which is also its target capital structure, is 40% debt ad 60% common equity. Next year's net income is projected to be \$21,000 and XYZ's payout ratio is 30%. The company's earnings and dividends are growing at a constant rate of 5%; the last dividend (D0) was \$2.00; and the current e

### After-Tax Cost of Funds and Cost of Capital: Example Problem

Calculate the after-tax cost of funds and the weighted average cost of capital (WACC) for the following: Common stock Debt (annual coupon) last dividend 3.85 coupon rate 9% market value \$45 maturity 20 growth rate \$5% market value \$1100.00 flotation costs 3%

### WACC Estimation

Assume that you were recently hired by a company (TII), as a financial analyst and that your boss, the treasurer, has asked you to estimate the company's Weighted Average Cost of Capital (WACC) under the assumption that NO new equity will be issued. The cost of capital should be appropriate for use in evaluating projects that a

### Weighted Average cost of capital - Alcoa Inc.

Calculate Weighted Average Cost of Capital (WACC) for Alcoa, Inc. Please show all work. Here is the end of year reports for 2009 http://www.alcoa.com/global/en/investment/pdfs/2009_Annual_Report.pdf

### Sorensen Systems Inc. WACC

Sorensen Systems Inc. is expected to pay a \$2.50 dividend at year end (D1 = \$2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for \$60.00 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55%

### By how much did the change in the WACC affect the project's forecasted NPV?

Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the

### What is the component cost of debt for use in the WACC calculation?

20. Several years ago the Jakob Company sold a \$1,000 par value, noncallable bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for \$950, and the company's tax rate is 40%. What is the component cost of debt for use in the WACC calculation? 4.81% 4.49%

### What is the component cost of debt for use in the WACC calculation?

14. To help finance a major expansion, Castro Chemical Company sold a noncallable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semiannually, sells at a price of \$850, and has a par value of \$1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in

### By how much did the change in the WACC affect the project's forecasted NPV?

10. Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. However, before Lasik decided to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in

### By how much did the change in the WACC affect the project's forecasted NPV?

3. Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in

### If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation?

17. To help finance a major expansion, Castro Chemical Company sold a noncallable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semiannually, sells at a price of \$875, and has a par value of \$1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in

### What is the company's WACC if all the equity used is from retained earnings?

13. Sorensen Systems Inc. is expected to pay a \$2.50 dividend at year end (D1 = \$2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for \$67.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt an

### If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation?

12. To help finance a major expansion, Castro Chemical Company sold a noncallable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semiannually, sells at a price of \$1,175, and has a par value of \$1,000. If the firm's tax rate is 40%, what is the component cost of debt for use

### What is Quigley's WACC?

11. You were hired as a consultant to Quigley Company, whose target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of retained earnings is 12.00%, and the tax rate is 40%. The firm will not be issuing any new stock. What

### By how much did the change in the WACC affect the project's forecasted NPV?

5. Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. However, before Lasik decided to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in

### What is the component cost of debt for use in the WACC calculation?

3. Several years ago the Jakob Company sold a \$1,000 par value, noncallable bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for \$1,200, and the company's tax rate is 40%. What is the component cost of debt for use in the WACC calculation? 2.54% 2.70%

### Change in NPV: Changed WACC

The Federal Reserve recently shifted its monetary policy, causing Lasik Vision's WACC to change. Lasik had recently analyzed the project whose cash flows are shown below. However, the CFO wants to reconsider this and all other proposed projects in view of the Fed action. How much did the changed WACC cause the forecasted NPV to

### Changed WACC

The Federal Reserve recently shifted its monetary policy, causing Lasik Vision's WACC to change. Lasik had recently analyzed the project whose cash flows are shown below. However, the CFO wants to reconsider this and all other proposed projects in view of the Fed action. How much did the changed WACC cause the forecasted NPV to

### What is Quigley's WACC

You were hired as a consultant to Quigley Company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of retained earnings is 12.25%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Qu

### Preferred stock for use in calculating the WACC

Hettenhouse Company's perpetual preferred stock sells for \$102.50 per share, and it pays a \$9.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in calculating the WACC?

### The Cost of Capital- Joe the bartender

My good old pal Joe the bartender called me into his place the other day with what he thought was a great riddle for me. He told me that if I get it right, he will send a case of fresh orange juice to me. He said two mutually exclusive projects are being considered. First, a short-term project might have a higher ranking under t

### Consider Three Companies: General Dynamics, Sprint, and Dell

Consider three companies: General Dynamics, Sprint, and Dell. Reflect on the nature of the business of these three companies. You are recommended to also get to the web site of one company in each of these categories. You might also check what the beta of each of these companies is. Based on the readings of the Module, and u

### This is a finance problem.

Cape Cod Enterprises Inc. has a capital structure consisting of \$30 million in long-term debt and \$20 million in common equity. There is no preferred stock outstanding. The interest rate paid on the long-term debt is 12%. Cape Cod is in the 30% tax bracket. On the common equity (stock), the Company pays an annual dividend

### MM

If a firm is financed solely by equity is considering issuing debt and using proceeds to repurchase some of the outstanding shares at the current market price of \$34.61. There are currently 195,000 shares outstanding. EBIT is expected to remain at \$1.1 million, with all earnings paid out as dividends. The firm can issue debt

### Financial Management Principles and Applications

Crypton Electronics has a capital structure consisting of 40% common stock and 60% debt. A debt issue of \$1,000 par value 6 percent bonds, maturing in 15 years and paying annual interest, will sell for \$975. Flotation cost for the bonds will be \$15 per bond. Common stock of the firm is currently selling for \$30 per share. The fi

### Weighted Average Cost

On May 1, XYZ Company had a work-in-process inventory of 10,000 units. The units were 100% complete for material and 30% complete for conversion, with respective costs of \$30,000 and \$1,850. During the month, 150,000 units were completed and transferred to finished goods. The May 31 ending work-in-process inventory consisted

### WACC: Should Your Firm Proceed with the Investment?

Your firm has just developed a new handheld PDA, code-named the Model A. To produce Model A, the firm would need to invest \$20 million in new plant and equipment. The firm would sell Model A for a per unit profit of \$200. Sales are expected to be 30,000 units in year 1, 40,000 in year 2, and 50,000 in year 3. Net working capita

### Clark Communications: Weighted Average Cost of Capital (WACC)

Clark Communications has a capital structure that consists of 70 percent common stock and 30 percent long-term debt. In order to calculate Clark's weighted average cost of capital (WACC), an analyst has accumulated the following information: ? The company currently has 15-year bonds outstanding with annual coupon payments of

### Discounting unlevered cash flows, cost of debt, WACC

1. Discounting the unlevered after tax cash flows by the __________ minus the ________ yield the __________. a. cost of capital for the unlevered firm; initial investment; adjusted prevent value. b. Cost of equity capital; initial investment; project NPV. c. Weighted cost of capital; fractional equity investment; project NPV.

### WACC/Dividend payment/Financial Leverage

1. Calculate the Weighted Average Cost of Capital for the following scenario. Johnson enterprise has a capital structure of 50% bonds, 30% preferred stock, and 20% common equity stock. Their corporate tax rate is 35%. They pay the bond holders 12%. They pay the preferred stock holders 7%. The common stock holders receive 18%. C