*Determine the weights average cost of capital for a firm given the follow info
ID: 2665357 • Letter: #
Question
*Determine the weights average cost of capital for a firm given the follow info below
Equity : $200,000 shares;stock price of $73
Beta of 1.54; risk free rate of 4%; risk premium of 6%
Debt info: Book value of $3 million; interest expense of $278,000; average maturity of 13 years; Pre-tax cost of debt of 6.5%; tax rate of 30%
* what is the weighted average cost of capital if stock falls to $65.70 (a 10% decline in price). Leave all other variables as the same before
* What is the weighted Average Cost of capital is stock prices fall for $65.70 and the beta of the firm rises to 1.60. Leave all other variables to same as before.
*Suppse the pre-tax costs of debt increases to 8% because of the fall in stock price and rise in systematic risk. Determine the weighted average cost of capital.
Explanation / Answer
cost of equity = Rf+ beta * riske premium = 4% + 1.54(6%) = 13.24% cost of debt = $278000 / 3 millioon = 9.27% Weigths are rE=200000 /[$200000 +3000000] =0.0625 rD= +$ 3000000 / [200000+3000000] = 0.9375 = * what is the weighted average cost of capital if stock falls to $65.70 (a 10% decline in price). Leave all other variables as the same beforeWACC = We*rE + Wd*rD(1- TAX) if stock price change ,hten no effect on rE 0.0625* 13.27% + 0.9375* 9.27%(1-0.3) = 0.00829 + 0.0608344 =6.91% WACC = We*rE + Wd*rD(1- TAX) if stock price change ,hten no effect on rE 0.0625* 13.27% + 0.9375* 9.27%(1-0.3) = 0.00829 + 0.0608344 =6.91% *)What is the weighted Average Cost of capital is stock prices fall for $65.70 and the beta of the firm rises to 1.60. Leave all other variables to same as before.
WACC = We*rE + Wd*rD(1- TAX) if beta chang then 1.60 *( 6%) + 4% =13.6% 0.0625* 13.6% + 0.9375* 9.27%(1-0.3) = 0.0085 + 0.0608344 =6.93% *Suppse the pre-tax costs of debt increases to 8% because of the fall in stock price and rise in systematic risk. Determine the weighted average cost of capital.
WACC = We*rE + Wd*rD(1- TAX) 0.0625 * 13.27% +0.9375 * 8% ( 1-03) =6.07%
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