1. Firm A has Total Assets of $ 5,000,000. The firm\'s Total Liabilities equals
ID: 2767886 • Letter: 1
Question
1. Firm A has Total Assets of $ 5,000,000. The firm's Total Liabilities equals $ 2,000,000. The Cost of Debt is 7% and all remaining financing costs 14%. The firm's After-Tax Rate is 60%. Given this information, please determine the Weighted Average Cost of Capital (WACC) for Firm A.
2. Firm B has Total Preferred Stock of $ 2,000,000. Total Common Equity is $ 4,000,000 and the Total Assets base is $ 10,000,000. The Corporate Income Tax Rate is 40% and the After-Tax Cost of Debt is 5%. The Cost of Preferred Equity is 12%, and Common Stockholders require a 16% Rate of Return. Based upon this information, please determine the Weighted Average Cost of Capital.
3. Firm C has a Beta of 1.5. The Expected % .. Return on the General Market is 14%, and T-Bills are paying a 2% Rate of Return. Given this scenario, what % ... Return would Firm C require on its long term investments.
4. For Problem # 3 above, presume that it is the Market Premium that is 14%. If all else is as presented in Problem # 3, please determine the % ... Return that Firm C would require on its long term investments.
5. Under the scenario presented in Problem # 4 above, what is the % Expected Rate of Return on the General Market.
6. You are vying for a personal loan. The term of the loan will be 1 year, but you will repay the loan in 12 monthly payments (made at the end of each month). If the % Interest Rate is 12%, what payment must be made monthly if the loan amount is $ 20,000 ?
7. Firm D has Net Sales of $ 5,000,000 for the year ended 12-31-'15. The Gross Margin is 50% and S,G & A is 30% of Sales. The Cost of Debt is 10%, and the Interest Expense is $ 100,000. The Corporate Income Tax Rate is 20%, and Total Equity equals Total Debt. Given this scenario:
a. perform ratio analysis to the extent possible (based upon the 4 key categories focused upon in class), and
b. determine the Weighted Average Cost of Capital, assuming that the actual ROE is the Required Return on Equity.
Explanation / Answer
Solution of question 1
Value of total assets = $500,000
Value of total liabilities = $200,000
Value of equity = $300,000
Weight of debt = 40%
Weight of equity = 60%
Cost of debt before tax = 7%
Cost of equity = 14%
After Tax rate = 40%
WACC = 60% × 14% + 40% × 7% × 60%
= 8.4% + 40% × 4.2%
= 8.4% + 1.68%
= 10.08%
WACC of company is 10.08%.
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