T Finding the WACC:<?xml:namespace prefix = o ns = \"urn:schemas-microsoft-com:o
ID: 2697767 • Letter: T
Question
T
Finding the WACC:<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Monica is the CFO of Cooking for Friends and uses the pecking order hypothesis philosophy when she raises capital for company projects. Currently she can borrow $6000,000 from her bank at a rate of 8.5%, float a bond for $1,100,000 at a rate of 9.25% or issue additional stock for $1,300,000 at a cost of 17%. What is the WACC for CFF if Monica chooses to invest:
a. $1,000,000 in new projects
b. $2,000,000 in new projects
c. $3,000,000 in new projects
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Explanation / Answer
a)WACC = ((600000/1000000)* 8.5%) + ((400000/1000000)*9.25%) = 8.8%
b)WACC = ((600000/2000000)* 8.5%) + ((1100000/2000000)*9.25%) + ((300000/2000000) *17%) = 10.19%
c)WACC = ((600000/3000000)* 8.5%) + ((1100000/3000000)*9.25%) + ((1300000/3000000) *17%) =12.46%
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