Total 9 questions . Read questions very carefully Total 90 points (You will get
ID: 2785854 • Letter: T
Question
Total 9 questions . Read questions very carefully Total 90 points (You will get a % score out of 100%) Be sure to show your work on the calculation questions. #1. (10pts) Estimating the WACC. ABC Corp has a market capitalization of $120 million, and $30 million in outstanding debt. The firm's equity beta is 1.2, risk free rate is 3%, and market risk premium is 4%. The yield on firm's outstanding debt is 5%, what is ABC Corp's WACC after tax? Assume tax rate is 40% and use two equations which are in lecture slides. Show your work. .(10pts) XYZ Manufacturing Company is evaluating two forklift systems to use in its p oduces the towers for a windmill power farm. The costs and cash flows from these systems low. If the company uses a 10% discount rate (cost of capital) for all projects, determine tem should be purchased (Solve the question using a mathematical equation, finExplanation / Answer
Answer)
Capital structure of ABC
Total Firm Value = Total Debt + Total equity = 120+30 = 150
Weight of debt = 30/150 = 20%
Weight of equity = 120/150 = 80%
Cost of equity = Risk free rate + Beta * Market risk premium
Cost of equity = 3% + 1.2 *4% =7.8%
Cost of debt = 5%
After tax WACC
=weight of debt * cost of debt * (1-tax rate) + weight of equity * cost of equity
= 0.006+0.0624=0.0684 or 6.84%