Answers of sheet two

Answer 1

Answer 2

Answer 3

After Tax Cost of Debt (ri) = 8.56% (1-40%) = 5.14%

d) In Case of Existing Common Stock

Source of Capital Target Capital Cost of Capital Source Weighted Cost

Structure
Long Term Debt 0.30 5.14% 1.542%
Preferred Stock 0.20 8.44% 1.69%
Common Stock 0.50 13.78% 6.89%
WACC= (1.542 + 1.69
+ 6.89) = 10.13 %
In Case of New Issues of Common Stock

Source of Capital Target Capital Structure Cost of Capital Source Weighted Cost
Long Term Debt 0.30 5.14% 1.542%
Preferred Stock 0.20 8.44% 1.69%

Common Stock 0.50 14.97% 7.48%

WACC= (1.542 + 1.69 +

7.48) = 10.715 %
Answer 4

Sources of Capital Market value weight Individual Cost Weighted Average

Cost
Long term Debt 3,840,000 55.65% 6% 3.339

Proffered Stock 60,000 0.87% 13% 0.1131

Common Stock 3,000,000 43.48% 17% 7.3916

Equity

Total 6,900,000 100% 10.8437%

c. The WACC calculated using the Market value is higher because it is calculated with recent values not
historical ones.