Chapter $14$

Q$4)$ a$)$ Dimond $7$ has been operating an excavation company in British Columbia for the last $20$ years. The company

has been successful in generaling revenue and free cash flows $($FCF$).$ The company is planning to replace $7$

excavators. The supplier will trade in old excavators and will deduct $$95,000$ from the total purchase price of inew

excavalors. Each new excavator will cost $$175,000.$

The corporate tax rate is $35\%.$ The company beta $({}_3)$ is $1\mathrm{.}35,$ risk$-$free return $(R)$ is $4\mathrm{.}69\%,$ and the expected rate of

return on market portiolio is $8\%.$ Based on the risk, the bank will charge $7\mathrm{.}35\%$ on the comimercial loans$/$chattel

mortgages granted for excavators. The company will use $60\%$ equily financing and $40\%$ debt financing.

Based on the above information, please calculate the WACC. Please show all the calculations by which you came up

with the final answer. $(3$ Points$)$

b$)$ Another excavation company called Diamond $12$ has $50,000$ shares of common stock outstanding with a market

price of $$50$ per share. It thas $1,500$ bonds outstanding, each selling for $$1,350.$ The bonds mature in $15$ years, have a

coupon rate of $7\mathrm{.}50\%($ie$,$ the cost of debt for WACC$),$ and pay coupons annually. The firmis beta is $1\mathrm{.}95,$ the risk$-$free

rate is $4\mathrm{.}05\%,$ and the expected rate of retum on market porticilio is $7\mathrm{.}50\%.$ The tax rate is $4\mathrm{.}0\%.$

Based on the above information, please calculate the WACC. Please show all the calculations by which you came up

with the final answer. $(3$ Points$)$