Confirm the below calculations. Compare how the below calculated WACC is different than 4.36% . Explain how
Question:
Confirm the below calculations. Compare how the below calculated WACC is different than 4.36%. Explain how the different WACCs impact the NPV for the Electro-bicycle project.
Calculations for Optimus' required rate of return on equity using the capital asset pricing model (CAPM). Based on my last name the BETA is 1.20
Formula Optimus
Rf 4.0%
Rmkt 6.0%
B 1.20
Required Return = Rf + B (Rmkt)
Required Return = 0.04 + 1.20 (0.06)
Required Return = 0.04 + 0.072
Required Return = 0.112 or 11.2%
Calculation of Optimus' WACC with feeding of 40% debt and 60% common stock. With the debt having after-tax cost of 4%.
WACC = (Wd) (after-tax cost of debt) + (We)(Ke)
WACC= (0.4)(0.04)+(0.6)(0.112)
WACC = 0.016 + 0.0672
WACC = 0.0832 or 8.3%
Fundamentals of Financial Management
ISBN: 978-0324597707
12th edition
Authors: Eugene F. Brigham, Joel F. Houston