Question

The following data applies to Micro Advanced Developers (MAD).

Debt Equity

market value of debt = $211,044 market value of equity = $281,346

time to maturity of debt = 10 years risk free rate = 3.8% pa

coupon rate = 4.2% pa paid semi-annually market risk premium = 8.0% pa

face value = $300,000 DDD beta = 1.08

As a financial manager you have been given the task of calculating the company's weighted average cost of capital (WACC). Ignore the effect of taxes.

a)Firstly, you realise that the cost of debt is needed. Calculate the cost of debt for MAD. You may give your answer as a percentage per annum to the nearest percent or use linear interpolation or a financial calculator to give a more accurate result. Cost of debt =_____ % pa

b)Secondly, the cost of equity must also be identified. Calculate the cost of equity for MAD. Give your answer as a percentage per annum to 1 decimal place. Cost of equity =______ % pa

c)Finally, calculate the weighted average cost of capital for MAD. Give your answer as a percentage per annum to 1 decimal place. Weighted average cost of capital =_____________ % pa

Answer 1

(a) Cost of debt = Coupon rate p.a.

= 4.2% p.a.

(b) Cost of equity

Risk free rate (Rf) = 3.8%

Beta. = 1.08

Market risk Premium. = 8%

Cost of equity =Rf+beta*market risk premium

= 3.8%+1.08*8%

= 3.8%+8.64%

= 12.44%

Cost of equity = 12.44%

(c) Calculation of Weighted average cost of capital (WACC):

Particulars	Market value	Weight (1)	Cost (2)	WACC (3) (1*2)
Debt	211,044	211,044/492390= 0.43	4.2%	1.806%
Equity	281,346	281,346/492390=0.57	12.44%	7.0908%
	492,390			8.8968%

WACC = 8.8968%