This case provides a comprehensive and realistic review of WACC computations and some of the theoretical questions related to the WACC and its uses.
1. Compute the yield to maturity and the after-tax cost of debt for the two bond issues.
2. Compute BioCom’s cost of preferred stock.
3. Compute BioCom’s cost of common equity. Use the average of results from the dividend growth model and the security market line.
4. Compute BioCom’s weighted average cost of capital. Should you use book values or market values for this computation?
5. BioCom could sell new bonds with maturities of fifteen to twenty years at approximately the same yield as Bond 2. It would, however, incur flotation costs of $20.00 per $1,000 of par value. Estimate the effective interest rate BioCom would have to pay on a new issue of long-term debt.
6. Some of BioCom’s projects are of low risk, some average risk, and some high risk. Should BioCom use the cost of capital to evaluate all of its projects, or adjust the discount rate to reflect different levels of risk?

  • CreatedMay 08, 2014
  • Files Included
Post your question