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8/11/2019 MF Cost of Capital - Practice Questions
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q1
Par value 1000
Discount 10%Coupon rate 6%
Tax rate 30%
6% 8%
CF PVIF
0 -900 1.00 900.00- 1.00 900.00-
1 60 0.94 56.60 0.93 55.56
2 60 0.89 53.40 0.86 51.44
3 60 0.84 50.38 0.79 47.63
4 60 0.79 47.53 0.74 44.10
5 60 0.75 44.84 0.68 40.836 60 0.70 42.30 0.63 37.81
7 60 0.67 39.90 0.58 35.01
8 60 0.63 37.64 0.54 32.42
9 60 0.59 35.51 0.50 30.01
10 1060 0.56 591.90 0.46 490.99
100.00 34.20-
IRR =
IRR = 7.454%
After-tax cost of debt 5.22%
ra + NPVa x (ra - rb)
NPVa-NPVb
A company wishes to purchase 100 machines at $720,000 each. It
will issue debt at the full
purchase price from 31 Dec 01 which would be redeemable at par
value of $1000 in 10 years. The
debt would be issued at 10% discount of the par value. Coupon
interest rates at 6% and tax at
30%. What is the after tax cost of debt?
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8/11/2019 MF Cost of Capital - Practice Questions
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Company A is funded as follows:
Balance Sheet Extract
MV Ratio
Ordinary Shares (50c) 2,000 5,000.00 64.1%
12% Loan Notes 1,500 1,590 20.4%
8% Preference Shares ($1) 500 460.00 5.9%Bank Loan 750 750
9.6%
7,800.00 100.0%
Details on these are as follows.
The company has an equity beta of 1.2. Government bonds are
currently trading at 6% and t
The Loan notes are currently trading at $106 and are redeemable
at par in 5 years time.
The preference shares are trading at 92c.
The bank loan has an interest rate of 10%.
The current share price is $1.25.
The tax rate is 30%.
Calculate the Weighted Average Cost of Capital.
Cost of equity Cost of pref shares
ke = rf + (rm - rf) kp = I/P
ke 14.4% kp = 8.7%
Cost of 12% Loan Notes WACC Equity
Par value 100 Loan Note
Market value 106 Pref ShareCoupon rate 12% Bank Loan
Tax rate 30%
11% 11%
CF PVIF
0 -106 1.00 106.00- 1.00 106.00-
1 12 0.90 10.86 0.90 10.81
2 12 0.82 9.83 0.81 9.74
3 12 0.74 8.89 0.73 8.77
4 12 0.67 8.05 0.66 7.905 12 0.61 7.28 0.59 7.12
6 12 0.55 6.59 0.53 6.42
7 12 0.50 5.97 0.48 5.78
8 12 0.45 5.40 0.43 5.21
9 12 0.41 4.89 0.39 4.69
10 112 0.37 41.27 0.35 39.44
3.02 0.11-
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8/11/2019 MF Cost of Capital - Practice Questions
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IRR = ra + NPVa x (ra - rb)
NPVa-NPVb
IRR = 10.982%
After-tax cost of debt 7.69%
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8/11/2019 MF Cost of Capital - Practice Questions
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e average market risk premium is 7%.
Cost Weightage Sumproduct
14.4% 64.1% 9.2%
7.69% 20.4% 1.6%
8.7% 5.9% 0.5%10% 9.6% 1.0%
WACC >>> 12.3%
