Given, Debt to Value ratio = 30 %, or say Debt / Equity ratio = 30 / 100 That me
ID: 2771146 • Letter: G
Question
Given, Debt to Value ratio = 30 %, or say Debt / Equity ratio = 30 / 100
That means,
Value
Weights
Cost of Capital
Cost of Capital
Weighted Cost of Capital
Debt
30
23.08%
7.5% *(1-0.35)= 4.875
4.88%
1.13%
Equity
100
76.92%
12%(Given)
12%
9.23%
Total
130
100.00%
Weighted Average Cost of Capital
10.36%
Based on the WACC calculation, provide a summarizing your recommendations for Whispering Pines.
You should show all calculations for the assignment. In addition to the required text, provide at least one scholarly reference to support your answer.
Value
Weights
Cost of Capital
Cost of Capital
Weighted Cost of Capital
Debt
30
23.08%
7.5% *(1-0.35)= 4.875
4.88%
1.13%
Equity
100
76.92%
12%(Given)
12%
9.23%
Total
130
100.00%
Weighted Average Cost of Capital
10.36%
Explanation / Answer
Answer: The expected rate of return on the shares is 12% for the whispering pines inc. The Whispering Pines Inc.
is a all equity financed company. This means that all the funds in the company have been the invested. For shareholders, wealth maximization is the aim and the same is been done by WACC. If the cost of equity is lower than the cost of debt, all in equity should fund the projects. If the Cost of Debt is lower, the mix should be derived so as to maximize the debt fund application and minimize the equity application.
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