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WACC, Required Return on Equity, CAPM, IRR & Present Value

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WACC: Common stock of the company KewCo. has a beta of 1.3. Treasury Bills provide a return of 4% and the market risk premium is 16%. Suppose KewCo. total value is composed of 60% equity and 40% debt (by market value). Debt yields of 8%. There are no shares of preferred stock in circulation.

a. Find the cost of equity capital for KewCo

b. Suppose KewCo. has a total value, V of $1,000,000,000. If there are 15,000,000 shares of KewCo stock outstanding, what is the current price of a share of KewCo equity?

c. What is the WACC if the firm faces an average tax rate of 40%

d. Suppose KewCo is considering a project with an IRR of 12%, should it accept the project? Why or why not?

e. Suppose KewCo is considering a product line that will provide expected new net cash flows of $100,000 per year for 4 years. What is the maximum amount KewCo would be willing to pay for this new product line today?

In excel format.

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Solution Summary

The solution provide a classic example to compute cost of equity, cost of debt, WACC, share price, whether to accept project based on IRR and present value of new cash flows for a project. Attached in Excel.