Question

Based upon the following facts calculate the Weighted Average Cost of Capital (WACC) for Student Success Corporation (SSC): PART 1 WACC Tax rate 40 % Debt Financing: $10,000 Face Value 10-Year, 5 % Coupon, Semiannual Non-Callable Bonds Selling for $11,040 New bonds will be privately placed with no flotation cost. >Common Stock: Current Price $40; Current Dividend $3.00 and Growth Rate 5 %. >Common Stock: Beta 1.1; Risk Free Rate 2.0 %; Required Return of the Market 7% Capital structure: 40% Debt, 60 % Common Equity: 1) What is the cost of debt? 2) What is the cost of equity- use both CAPM and the Dividend Model? 3) What is the WACC for Equity you can use either answer above or an average? PART 2-Capital Budget If SSC is deciding upon whether to approve a capital project and the cash flows are as follows: Year 0 (initial investment) $2,000 $1,000 $600 $400 $4,000 Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 Cash Flow Calculate: 1) Net Present Value (NPV) 2) Internal Rate of Return (IRR) 3) Payback Period Remember to use the WACC from above for the NPV and to compare to the IRR. Should this project be approved and why or why not?

Answer 1

Answer: PART- WACC Cast of Oebt ie. kol using appoxmaton Matuod Colulohan kds Coupon interet C1-t+ (Motority Valua- Bo Moturity value +Bo 350 CL-040) +(10,000 ao 1,040 Ka 100 X- 10,000 11040 100 kd 0.9315 Pos 6 Month 9&100 10520 kd (per annon bosis) 093Is6 x a .863 % Price Bond tod ay n No. peciods Moturity t tox Rote Bo 7

Corta Equity 2. ie ke Sing CAPM Model Re t BCRm-Rf) TRRiskfree Peturn Rm-Rf)-Morkot Risk Bola premium Stock Ja(-a) Ke= a t 7.5% sing Dividend Madel Current Diuidend Di 3,00 Assuming it to beNest xpecte grow ta Rote Po-Price Dividend S 40 Ke = DI + Po 3.O0 +0.05 40 12.5% Averge 4ke (using CAPM ond Divided Modd(2.5 43.5)2 17 Copitel Structune wp weight Delt we = wagjat g Eguirg 60% 7 WACC wpx Kd) t (WEXKE Co.br.963) (04 o 5 12% (approx

PART -2 Capinl Busdgahmng Q Deciion Colaudohon NPV [Net Present Value Presentvalue Cohout Hous (Pvco)$2,000 Coda inflou (PycT) Cash Flow Pre seut valus Present Values Preseat Valua factor5.22 Yeor 951,29 1 0.95 129 0.१०५११ 5५२.११ऽ५ 600 3 3५५.3ऽ २8 O.860882 0.8189 523 Total 4,000 3,27S.808 S 5 ।।५.५3 RM-1PHI PvcI-Pvco S॥५.५३- २००० t$3114.43 NPV 17