Wacc, Npv, and Irr Calculations

Name: Chico DeBarge_______________________________

Class: __FIN 370______________________________

Homework: WACC, NPV, and IRR Calculations

1. Calculate Company A’s weighted average cost of debt, given the following information: (a) Tax Rate: 25%, (b) Average Price of Outstanding Bonds: $975, (c) Coupon Rate: 4%, (d) NPER: 25, (e) Debt: $23,000,000, (f) Equity: $20,000,000, and (g) Preferred Stock: $10,000,000.

Before tax cost of Debt = $40+[$1000-97525](975+1000)/2 = 41/987.50 =4.15%

After-Tax Cost of Debt = 4.15% x (1 – 0.25) = 3.11%

Weighted Average Cost of Debt = 3.11% x 0.43396 = 1.35%

2. Calculate Company B’s weighted average cost of equity, given the following information: (a) Risk Free Rate of Return: 4%, (b) Market Return: 8%, (c) Beta for Company B: .80, (d) Debt: $23,000,000, (e) Equity: $20,000,000, and (f) Preferred Stock: $10,000,000.

Cost of Equity = 4% + [0.8 (8% - 4%] = 7.2%

Weighted Average Cost of Equity = 7.2% x 0.37736 = 2.72%

3. Calculate Company C’s weighted average cost of preferred stock, given the following information: (a) Coupon Payments: $4.00, (b) Price of Preferred Stock: $65.00, (c) Debt: $23,000,000, (d) Equity: $20,000,000, and (e) Preferred Stock: $10,000,000.

Cost of Preferred Stock = $4/$65 = 0.0615 or 6.15%

Weighted Average Cost of Preferred Stock = 6.15% x 0.18868 =1.16%

4. Calculate Company D’s weighted average cost of capital, given the following information: (a) Tax Rate: 32%, (b) Average Price of Outstanding Bonds: $1,050, (c) Coupon Rate (Debt): 6%, (d) NPER (Debt): 25, (e) Risk Free Rate of Return: 3%, (f) Market Return: 10%, (g) Beta for Company B: 1.00, (h) Coupon Payments on Preferred Stock: $5.00, (i) Price of Preferred Stock: $75.00, (j) Debt: $23,000,000, (k) Equity: $20,000,000, and (l) Preferred Stock: $10,000,000.

a. Before tax cost of Debt = $60+[$1000-105025](1050+1000)/2 = 58/1025 =5.66%

After-Tax Cost of Debt = 5.66% x (1 – 0.32) = 3.85%

b....