# WACC

 Short Paper Part 1 1) Calculate the WACC We are told: Weights of 30% debt and 70% common equity (no preferred equity) A 35% tax rate The cost of debt is now 9% The beta of the company is 1.2 The risk free rate is 2% The return on the market is 12% First calculate the expected cost of equity determined using the CAPM: CAPM = Risk Free Rate + Equity Beta * Market Risk Premium 0.14 market risk premium = Return on Market – Risk free rate 0.1 So CAPM = Rrf + (beta*(retrurn on market – Rrf) Next calculate the WACC of the firm: WACC = (Weight Debt * Cost of Debt) + (Weight Equity * Cost of Equity ) Cost of debt*(1-Tax rate) 5.85% WACC 11.56% Part 2 Initial investment outlay of \$60 million, comprised of \$50 million for machinery with \$10 million for net working capital (metal and gemstone inventory) Project and equipment life is 5 years Revenues are expected to increase \$50 million annually Gross margin percentage is 60% (not including depreciation) Depreciation is computed at the straight-line rate for tax purposes Selling, general, and administrative expenses are 5% of sales Tax rate is 30% Compute net present value and internal rate of return of the project Year 0 1 2 3 4 5 Comments Revenues 50 50 50 50 50 50 M per year Gross Margin 30 30 30 30 30 60% of revenues Sales & Admin 2.5 2.5 2.5 2.5 2.5 5% of revenues Depreciation 50 50 50 50 50 50 million over 5 years NWC Increase -10 10 million out year 0 NWC Recovery 10 10 million recovered end of project Capital Expenditures -60 50 million FCF -70 34.25 34.25 34.25 34.25 44.25 FCF=((Gross Margin-Sales&Admin)*(1-tax rate))+(Depreciation*tax rate)-NWC Increase – Capex + NWC recovery at end of project Tax 30% Discount Rate 26.60% NPV Use NPV Formula = CFo + (NPV(WACC,FCF1,FCF2,FCF3,FCF4,FCF5) 22.24 IRR Use IRR formula  =IRR(Cfo:Cf5) 41%

##### "Looking for a Similar Assignment? Order now and Get 10% Discount! Use Code "Newclient" 