• Read Corporate Finance: Core Principles and Applications, 5th Edition by Ross/Westerfield/Jaffe/Jordan. (Chapter 12).

WACC ASSIGNMENT

Risk-free rate 0.016 Market rate 0.078 Tax rate 30%

Loan	$2,000,000	Common stock
Interest rate	0.056	Beta	1.00
7 yr, B rated bond issue		Shares outstanding	310,000
Price per bond	$1,100	Price per share	$17.50
Number issued	1,210

Use the chart above to answer questions 1-6. Refer to the ratings chart in the slides to find the yield to maturity on the bond issue.

• What are the weights the bond issue and loans contribute to the company’s overall debt?
• What is the after-tax weighted average cost of debt?
• Using the CAPM, what is the required return on the company’s common stock?
• What is the market value of the firm’s common stock?
• What are the weights the debt and equity contribute to the company’s capital?
• What is the weighted average cost of capital?
• If the firm has a project with an expected return of 5%, should the firm invest in the project? Justify your answer.

 

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