Question

Suppose that your company is launching a new project. To estimate the cost of capital for...

Suppose that your company is launching a new project. To estimate the cost of capital for the project
you search the market and find a company that has very similar risk characteristics to the project as follows:
Market capitalization, MVE = $100.00 million
Market value of debt, D = $50.00 million
Cost of debt, Rd = 5.00%
Cost of equity, Re = 15.50%
Corporate tax rate, t = 30%
Calculate the cost of capital of the project for the following two cases:
The project is equity financed.
The project is funded by both debt and equity and has the same leverage ratio (D/E) as does the comparable.

Homework Answers

Answer #1

a.

cost of capital of the project if the project is equity financed is cost of equity that is 15.50%.

b.

The project is funded by both debt and equity and has the same leverage ratio then cost of capital of project would be WACC of company.

Market value of equity = $100 million

Market value of debt = $50 million

Total Value of capital = $150 million.
Weight of debt = 33.33%

Weight of equity = 66.67%

WACC is calculated below:

WACC = (66.67% × 15.50%) + (33.33% × 5%) × (1 - 30%)

= 10.33% + 1.17%

= 11.50%

WACC is 11.50%.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Your company has an equity cost of capital of 10%, debt cost of capital of 6%,...
Your company has an equity cost of capital of 10%, debt cost of capital of 6%, market capitalization of $10B, and an enterprise value of $14B. Your company pays a corporate tax rate of 35%. Your companymaintains a constant debt-to-equity ratio. a)What is the (net) debt value of your company? (Hint:Net debt = D–Excess cash) b)What is the(net)debt-to-equity ratio of your company? c)What is the unlevered cost of capital of your company?(Hint:When a firm has a target leverageratio, its unlevered...
Suppose the company is evaluating three projects with the following characteristics Each project has a cost...
Suppose the company is evaluating three projects with the following characteristics Each project has a cost of $1mil. They will be financed using the target mix of long-term debt, preferred stock, and common equity. The cost of the common equity for each project should be based on the beta estimated for the project. All equity will come from reinvested earnings. Beta rs rps rd(1-T) WACC Expected Return on Project Project A 0.5 9.5% 11% 6.5% 8.23% 9% Project B 1.0...
A company embarks on a new project. The project will have free cash flows at the...
A company embarks on a new project. The project will have free cash flows at the end of one year of 60 million if successful and 20 million if not successful. The probability that the project is successful is 0.4. The cost of capital if the project is unlevered is 20%. The cost of debt capital is 5%. Calculate the rate of return to investors if 10,000,000 is financed with debt.
Company S is a very small company in terms of market capitalization, has total assets of...
Company S is a very small company in terms of market capitalization, has total assets of $2 million financed 40 percent with debt and 60 percent with equity capital. The cost of debt is 7 percent before taxes. The cost of equity capital is 12 percent. The company has a net income of $200,000 and a tax rate of 30 percent. Calculate the residual income for this company. (show work)
. You are trying to estimate the cost of capital to use in assessing a new...
. You are trying to estimate the cost of capital to use in assessing a new investment venture in the entertainment business, for TechSmith Inc, a publicly traded electronics company. You have been provided the following information:             • The beta for TechSmith, based upon stock prices for the last 5 years, is 1.65 but the unlevered beta for entertainment companies is 1.08.             • At the moment, TechSmith has one bank loan outstanding, with a principal payment due of...
Suppose​ Alcatel-Lucent has an equity cost of capital of 10.7 %,market capitalization of$ 10.50 ​billion, and...
Suppose​ Alcatel-Lucent has an equity cost of capital of 10.7 %,market capitalization of$ 10.50 ​billion, and an enterprise value of $15 billion. Suppose​ Alcatel-Lucent's debt cost of capital is 7.2 % and its marginal tax rate is 34 % a. What is​ Alcatel-Lucent's WACC? b. If​ Alcatel-Lucent maintains a constant​ debt-equity ratio, what is the value of a project with average risk and the expected free cash flows as shown​ here, Year 0 1 2 3 FCF ($ million)   -100  ...
A company has a cost of common equity capital of 17 % and its cost of...
A company has a cost of common equity capital of 17 % and its cost of debt capital is 6 %. The firm is financed with $3,000,000 of common shares (market value) and $2,000,000 of debt. What is its after-tax weighted average cost of capital if it is subject to a 25 % tax rate?
6) Suppose​ Alcatel-Lucent has an equity cost of capital of 10%​, market capitalization of $10.80 ​billion,...
6) Suppose​ Alcatel-Lucent has an equity cost of capital of 10%​, market capitalization of $10.80 ​billion, and an enterprise value of $14.4 billion. Suppose​ Alcatel-Lucent's debt cost of capital is 6.1% and its marginal tax rate is 35%. a. What is​ Alcatel-Lucent's WACC? b. If​ Alcatel-Lucent maintains a constant​ debt-equity ratio, what is the value of a project with average risk and the expected free cash flows as shown​ here, Year 0, 1, 2, 3 FCF ($ million) -100, 50,...
(1)You are thinking of starting a new project. You do a cash-flow analysis and estimate that...
(1)You are thinking of starting a new project. You do a cash-flow analysis and estimate that the project will give you a free cash flow of $50M in one year and the free cash flows will grow at a rate of 2% per year perpetually. The equity beta for a firm similar to your proposed project is 1.4. This similar firm has $300M of risk-free debt outstanding and has 300 million shares, each valued at $5 each. It also has...
Arden Corporation is considering an investment in a new project with an unlevered cost of capital...
Arden Corporation is considering an investment in a new project with an unlevered cost of capital of 8.7%. ​Arden's marginal corporate tax rate is 37%​, and its debt cost of capital is 5.4%. a. Suppose Arden adjusts its debt continuously to maintain a constant​ debt-equity ratio of 0.5. What is the appropriate WACC for the new​ project? b. Suppose Arden adjusts its debt once per year to maintain a constant​ debt-equity ratio of 0.5. What is the appropriate WACC for...