# Corporate Finance - Corporate Finance Section 2

>>>>>>>>Corporate Finance Section 2

• Option : B
• Explanation : WACC = Wd Rd (1 – t) + Wp Rp + We Re = [0.13 * (1 – 0.30) + 0.17 + 0.22] / 3 = 16.03%

 Capitalcomponent Book Value(000) Market Value(000) Component cost Debt  x € 120 € 100 6% Preferred stock € 60 € 60 9% Common stock € 300 € 240 13%

• Option : A
• Explanation : The company’s weighted average cost WACC is equal to:
WACC = Wd Rd (1 – t) + Wp Rp + We Re The target capital structure
is: Market value of equity = 240 / 400 = 60%
Market value of debt = 100 / 400 = 25%
Market value of preferred stock = 60 / 400 = 15%>
Rd (1 – t) = 6% (1 – 35%) = 3.90%, Re = 13%, Rp = 9%
WACC = 0.25 * 3.9% + 0.15 * 9% + 0.60 * 13% = 10.13%

• Option : B
• Explanation : Wd = (D/E) / (1 + D/E) = 0.6 / (1 + 0.6) = 0.375
We = 1 - Wd = 1 – 0.375 = 0.625
WACC = Wd Rd (1 - t) + We Re
= 0.375 * 0.125 * (1 – 0.4) + 0.625 * 0.17 = 13.44%.

 Source Amount Cost Common Stock 100,000,000 16.0% Preferred Stock 2,000,000 14.5% Debt 18,000,000 12.0% Total 120,000,000

• Option : B
• Explanation : WACC = Wd Rd (1 – t) + Wp Rp + We Re = [(18/120) * 0.12 * (1 – 0.35)] + [(2/120) * 0.145] + [(100/120) * 0.16] = 14.745%

• Option : B
• Explanation : WACC = Wd Rd (1 – t) + Wp Rp + We Re Re
= Risk free rate + β (Market risk premium)
Re = 5 + 1.2 (7) = 13.4%
Rd = Debt rate (1 - tax rate) Rd = 11 (1 - 0.2) = 8.8%
Rp = Dividend / Price = 6 / 48 = 12.5%
WACC = 0.134 * 0.45 + 0.088 * 0.35 + 0.125 * 0.20
WACC = 11.6%