Please show calculations WACC Calculation Hartley Psychiatric. Inc. needs to pur
ID: 2664441 • Letter: P
Question
Please show calculations
WACC Calculation Hartley Psychiatric. Inc. needs to purchase office equipment for its 2,000 drive-in therapy centers nationwide. The total cost of the equipment is $2 million. It is estimated that the after-tax cash inflows from the project will be $210,000 annually forever. Hartley has a debt-to-value ratio of 40 percent based on market values. The firm's cost of equity is 13 percent and its pre-tax cost of debt is 8 percent. The flotation costs of debt and equity are 2 percent and 8 percent, respectively. Assume the firm's tax rate is 35 percent. What is Hartley's weighted average cost of capital?Explanation / Answer
Cost of the Equipment = $2,000,000
After-tax Cash inflows = $210,000 (annually forever)
Debt-to-value ratio = 40% based on maket values
Cost of Equity = 13%
Cost of Debt = 8%
Flotation cost of debt = 2%
Flotation cost of equity = 8%
Firm’s tax rate = 35%
Hartley’s Weighted Average Cost of Capital (WACC) =?
Debt to value (or) Equity ratio = 0.40
Total Equity = 1 + 0.40
Total Equity = 1.40
Total Debt = 0.40
Total Equity Weight = 1 / 1.40
Total Debt Weight = 0.40 / 1.40
Total Equity Weight = 0.71
Total Debt Weight = 0.29
Total Market Capital = 0.71 + 0.29 = 1
Target Weight on Equity (E/V) = 0.71
Target Weight on Debt (D/V) = 0.29
Cost of Debt = 8% (1-Flotation Costs)
Cost of Debt = 0.08 (1-0.02)
Cost of Debt = 0.0784
Cost of Equity = 13% (1-Floation Costs)
Cost of Equity = 0.13 (1-0.08)
Cost of Equity = 0.1196 (or) 11.96%
Calculating Weighted Average Cost of Capital (WACC):
Cost of Equity (RE) = 11.96%
Cost of Debt (RD) = 7.84%
Tax Rate (Tc) = 35%
WACC = [(E/V) * RE + (D/V) * RD (1-Tc)]
WACC = [(0.71 * 0.1196) + (0.29 * 0.0784 (1-0.35)]
WACC = [0.084916 + 0.0147784]
WACC = 0.0996944 (or) 9.97%
Weighted Average Cost of Capital = 9.97%
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