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Practice Question For Weighted Average Cost of Capital

The document contains 5 practice questions about calculating the weighted average cost of capital (WACC) for different companies. Each question provides financial information like debt amounts and yields, stock prices, required rates of return, tax rates, and capital structures. Based on this information, the questions ask to calculate the WACC using different methods like market value weights or assuming a target capital structure.

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Nirmal Thapa
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196 views2 pages

Practice Question For Weighted Average Cost of Capital

The document contains 5 practice questions about calculating the weighted average cost of capital (WACC) for different companies. Each question provides financial information like debt amounts and yields, stock prices, required rates of return, tax rates, and capital structures. Based on this information, the questions ask to calculate the WACC using different methods like market value weights or assuming a target capital structure.

Uploaded by

Nirmal Thapa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Practice question for Weighted Average Cost of Capital

1. Roxie Epoxy’s balance sheet shows a total of Rs 50 million long-term debt with a coupon
rate of 8.00% and a yield to maturity of 7.00%. This debt currently has a market value of
Rs 55 million. The balance sheet also shows that that the company has 20 million shares
of common stock, and the book value of the common equity (common stock plus
retained earnings) is Rs 65 million. The current stock price is Rs 8.25 per share;
stockholders' required return, rs, is 10.00%; and the firm's tax rate is 40%. Based on
market value weights, and assuming the firm is currently at its target capital structure,
what WACC should Roxie use to evaluate capital budgeting projects? (Ans 8.55%)

2. Assume that you are on the financial staff of Michelson Inc., and you have collected the
following data: (1) The yield on the company’s outstanding bonds is 8.00%, and its tax
rate is 40%. (2) The next expected dividend is Rs 0.65 a share, and the dividend is
expected to grow at a constant rate of 6.00% a year. (3) The price of Michelson's stock is
Rs 17.50 per share, and the flotation cost for selling new shares is F = 10%. (4) The target
capital structure is 45% debt and the balance is common equity. What is Michelson's
WACC, assuming it must issue new stock to finance its capital budget? (Ans 7.73%)

3. Infinity Industries has just issued some Rs 100 par preferred stock with a 10% dividend.
The stock is selling on the market for Rs 96.17, and Infinity must pay floatation costs of
6% of the market price. What is the cost of the preferred stock for Infinity? (Ans 11%)

4. Bruner Breakfast Foods’ (BBF) balance sheet shows a total of Rs 20 million long-term debt
with a coupon rate of 8.00%. The yield to maturity on this debt is 10.00%, and the debt
has a total current market value of Rs 18 million. The balance sheet also shows that that
the company has 10 million shares of stock, and total of common equity (common stock
plus retained earnings) is Rs 30 million. The current stock price is Rs 4.50 per share, and
stockholders' required rate of return, r s, is 12.25%. The company recently decided that
its target capital structure should have 50% debt, with the balance being common
equity. The tax rate is 40%. Calculate WACCs based on target, book, and market value
capital structures, and then find the sum of these three WACCs? (Ans 30.55%)

5. The SS Company has 1.4 million shares of stock outstanding. The stock currently sells for
Rs. 20 per share. The firm’s debt is publicly traded and was recently quoted at 93% of
face value. Its total faces value of Rs. 5 million and is currently priced to yield 11%. The
risk free rate is 8% and the market risk premium is 7%, beta is 0.74, Tax rate is 34%,
what is the WACC of SS? (Ans 12.34%)

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