Western Company

1) a) Western would use the estimates to determine the optimal capital structure for them. Also, they would use the cost of capital to decide which potential projects to accept or reject b) The market weights should be used to calculate WACC because it gives the most accurate and current picture of the situation. c) Current cost rates should be used because better presents the reality of transactions and provides more useful information than historical rates. The business environment is increasingly volatile; the firms should look at the reality of the situation firms rather than past transactions. d) Each one of subsidiaries of Western should have their own individual WACC because each subsidiary is treated like an individual firm that has its own unique risks. Each WACC for the subsisidaries would be calculated based on their weights and cost of debt, perferred stock, and common stock. They would have their own weights based on their capital structure. 2) a) This is accounted by the after-tax cost of debt. The net cost of the debt is the interest paid less the tax savings resulting from the tax-deductible interest b) The various units would have different costs of preferred stock. Preferred stock is often considered to be more like debt than equity because they can be either convertible or callable. Also, they are rated by credit rating companies like debt is so a higher rated preferred stock would cost the firm less than a lower rated preferred stock. c) Dividend $

stock price growth rate Cost of Ps 8.00 $ 114.00 4.50% 11.52%

3) a) 1- T-bill vs. T-bond: T-bills are shorter termed and changes in interest rates have very small effects on their price. T-bonds are longer termed and a change in interest rates will have a larger impact on their prices. T-bills are safer since they do not carry the higher interest rate risk. 2- Alternatives: 3- Beta: It is a measure of the volatility, or systematic risk, of a security or a portfolio in compared to the market. A...