Finding the WACC. Monica is the CFO of Cooking for Friends (CFF) and uses the pe

Question

Finding the WACC. Monica is the CFO of Cooking for Friends (CFF) and uses the pecking order hypothesis philosophy when she raises capital for company projects. Currently, she can borrow up to $450,000 from her bank at a rate of 7.5%, float a bond for $750,000 at a rate of 9.75%, or issue additional stock for $1,500,000 at a cost of 17%. What is the WACC for CFF if Monica chooses to invest a.$900,000 in new projects? b.$1,800,000 in new projects? c.$2,700,000 in new projects Finding the WACC. Monica is the CFO of Cooking for Friends (CFF) and uses the pecking order hypothesis philosophy when she raises capital for company projects. Currently, she can borrow up to $450,000 from her bank at a rate of 7.5%, float a bond for $750,000 at a rate of 9.75%, or issue additional stock for $1,500,000 at a cost of 17%. What is the WACC for CFF if Monica chooses to invest a.$900,000 in new projects? b.$1,800,000 in new projects? c.$2,700,000 in new projects Finding the WACC. Monica is the CFO of Cooking for Friends (CFF) and uses the pecking order hypothesis philosophy when she raises capital for company projects. Currently, she can borrow up to $450,000 from her bank at a rate of 7.5%, float a bond for $750,000 at a rate of 9.75%, or issue additional stock for $1,500,000 at a cost of 17%. What is the WACC for CFF if Monica chooses to invest a.$900,000 in new projects? b.$1,800,000 in new projects? c.$2,700,000 in new projects

Explanation / Answer

a. WACC = ((450,000/900,000)*7.5%) + ((450,000/900,000)*9.25%) = 3.75% + 4.625% = 8.375%

b. WACC = ((450,000/1,800,000)*7.5%) + ((750,000/1,800,000)*9.25%) + ((600,000/1,800,000)*17%)

= 1.875% + 3.854% + 5.66% = 11.39%

c. WACC = ((450,000/2,700,000)*7.5%) + ((750,000/2,700,000)*9.25%) + ((1,500,000/2,700,000)*17%)

= 1.25% + 2.569% + 9.44% = 13.26%

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