Question

0. You are going to finance a $100,000 project using $40,000 of debt financing at 7% and $60,000 of equity financing at 6%. What is the Weighted Average Cost of Capital (WACC)?

1. What is the Present Worth of $12,000 in year one and increasing by $500 per year for years 2 thru 6. The interest rate is 8% per year.

Answer 1

ANSWER:

1) WACC:

WACC = E / (E + D) * Re + D / (E + D) * Rd

E = $60,000 , D = $40,000 , Re = 6% , Rd = 7%

WACC = 60,000 / (60,000 + 40,000) * 6% + 40,000 / (60,000 + 40,000) * 7%

WACC = 60,000 / 100,000 * 6% + 40,000 / 100,000 * 7%

WACC = 0.6 * 6% + 0.4 * 7%

WACC = 0.036 + 0.028

WACC = 0.064 OR 6.4%

2) PW = CASH FLOW IN YEAR 1(P/A,I,N) + INCREASE IN COSTS(P/G,I,N)

PW = 12,000(P/A,8%,6) + 500(P/G,8%,6)

PW = 12,000 * 4.623 + 500 * 10.523

PW = 55,476 + 5,261.5

PW = 60,737.5

THE PRESENT WORTH IS $60,737.5