Question

Houston Event Company’s financing information:

Loan                                     $300,000                             Interest Expenses /Year                     $18,600

Annual Net Income            $106,000                             Equity Partner Share                                30%

Equity Invested                   $160,000                             Tax Rate                                                     20%

1. What is the weight of equity for Houston Event Company?

		A. 65.2%
		B. 53.3%
		C. 46.7%
		D. 34.8%

2. What is the WACC (Weighted Average of Cost of Capital) for Houston Event Company?

		A. 8.5%
		B. 9.3%
		C. 10.1%
		D. 10.9%

3. Jack is considering to purchase a heavy duty grill for his restaurant. Estimated total investment is $100,000, and below stream of net cash flow is expected for the next five years. If fair discount rate is 8%, what should be Jack’s decision?

             |------------|------------|------------|------------|------------|

             0                 1                2                3                4                5

-$100,000       $10,000     20,000      30,000      30,000        30,000

If fair discount rate is 8%, Net Present Value is:

		A.-$7,311
		B. $0
		C. $7,311
		D. $100,000

Answer 1

1. What is the weight of equity for Houston Event Company?

Weight of Equity = Equity Value /(Total Company value) = $160000 / (160000 + 300000) = 34.8% Option D

2. What is the WACC (Weighted Average of Cost of Capital) for Houston Event Company?

WACC= weight of equity * Cost of Equity + Weight of Debt * Cost of Debt

WACC= 34.80% * 106000 *30%/160000 + 65.20% * (18600/300000) * (1 - 0.20)

WACC= 34.80% * 19.875% + 65.20% * 0.0496

WACC= 10.1%

3. Option A - $7311

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