Corporate Finance - (WACC) Weighted Average Cost of Capital

[Your Name]
[Professor’s Name]
[Course Name and Number]
[Date of Submission]
Corporate Finance - (WACC) Weighted Average Cost of Capital
Part I
Calculation of WACC:
WACC
=
E
×
re
+
D
×
(1 − t)
×
rd
+
P
×
rp
(E+D+P)
(E+D+P)
(E+D+P)
Where:
E = 210,000 shares × $83
$17,430,000
D = 8500 bonds × $1000
$8,500,000
P = 12,000 shares × $98
$1,176,000
re
=
rf
+
β
×
(rm − rf)
= 4.8% + 1.15 × (7% - 4.8%)
= 7.33%
Cost of Debt = 7.8 % X (1-35%)
= 5.07%
WACC=17430,000×7.33%+8500,000×5.07%+1176,000×5.75%(17430,000+8500,000+1176,000)(17430,000+8500,000+1176,000)(17430,000+8500,000+1176,000)
= 0.047 + 0.015 + 0.002
= 6.4%
Part II.
NPV can be used in decision making for various project s and serve as an excellent tool. NPV is the sum of all the present values of future cash flows which takes into account the discounted cash flows associated with a certain project. The project has a $5.1 million after-tax saving which will grow on the same pace for next three years. For the acceptance of such projects the NPV of the project should be positive, which seems to be favorable in this situation.
The second consideration should be given to the sources of finance obtained for the project. The rate of return on specific project should be greater than the required WACC of sources of finance used for the project. This considera...