What is the formula used to get the WACC? Question - What is the Net Present Val

Question

What is the formula used to get the WACC?

Question - What is the Net Present Value?

Board of Directors target debt to capital ratio is 18%., Beta - 1.203. tax rate 40%

   Flash Memory, Inc. 2007 2008 2009 Sales ($ millions) 77 81 89 EPS ($) 1.52 0.09 1.68 Dividend per share ($) -- -- -- Closing stock price ($) n/a n/a n/a Shares outstanding (millions) 1.492 1.492 1.492 Book Value per share ($) 11.43 11.52 13.20 ROE 13.28% 0.78% 12.75% Capitalization (book value)     Debt 28% 34% 34%     Equity 72% 66% 66%

Explanation / Answer

The WACC formaule is :

(wt of debt*cost of debt)+(wt of equity*cost of equity)

Cost of debt=(1-tax rate)* cost of debt
COst of equity=Rf+beta*(Rm-Rf)

In the question the information for Risk free rate and Rm is missing and I am assuming it as Rf=2.5% and Rm-Rf called Market Risk Premium as 4%

beta=1.203 tax =40% debt to capital=18%
(D/D+E)=18% and (E/D+E)=1-18%=82%

Cost of equity= 2.5+1.203*4%=3.7%

cost of debt=interest expense/Debt (approximately)

Equity=Book value per share*no of shares =11.43*1.492=$17.05356 (in 2007)

This is 72% and debt is 28%=(28/72)*17.05356=$6.63mn
cost fo debt=480,000/6.63mn=2.03%

WACC=(18%*2.03*(1-.4))+(88%*3.7%)=3.475%

Net Present value= FCFF/(1+wacc)^n

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