1. Calculate HydroTech's net debt. 2. Compute HydroTech's equity and (net) debt weights based on the market...


1. Calculate HydroTech's net debt.

2. Compute HydroTech's equity and (net) debt weights based on the market value of equity and the book value of net debt.

3. Calculate the cost of equity capital using the CAPM, assuming a market risk premium of 5%.

4. Using a tax rate of 35%, calculate HydroTech's effective cost of debt capital.

5. Calculate HydroTech's WACC.

6. When is it appropriate to use this WACC to evaluate a new project?

You work for Hydro-Tech, a large manufacturer of high-pressure industrial water pumps. The firm specializes in natural disaster services, ranging from pumps that draw water from lakes, ponds, and streams in drought-stricken areas to pumps that remove high water volumes in flooded areas. You report directly to the CFO. Your boss has asked you to calculate Hydro-Tech's WACC in preparation for an executive retreat. Too bad you're not invited, as water pumps and skiing are on the agenda in Whistler, BC. At least you have an analyst on hand to gather the following required information:

1. The risk-free rate of interest, in this case, the yield of the 10-year government bond, which is 3%.

2. Specific information for Hydro-Tech:

a. Market capitalization (its market value of equity), $100 million

b. CAPM beta, 1.2

c. Total book value of debt outstanding, $50 million

d. Cash, $10 million

3. The cost of debt (using the quoted yields on Hydro-Tech's outstanding bond issues), which is 5%.

With this information in hand, you are now prepared to undertake the analysis.

Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking...
Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...
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Related Book For  book-img-for-question

Fundamentals of Corporate Finance

ISBN: 978-0133400694

1st canadian edition

Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford, David A. Stangeland, Andras Marosi

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