The beta for the equity in Fullsome Corporation is 0.95. The market risk premium is 7 per cent, and the risk-free rate is 4 per cent. Fullsome has a target debt/equity ratio of 25 per cent. Its cost of debt is 9 per cent, before taxes. If the tax rates is 30 per cent, what is the WACC?



2 .Flinging Ltd  currently has 50 million shares outstanding. The shares sell for $6. The firm's debt is publicly traded and was recently quoted at 60 per cent of face value. It has a total face value of $50 million, and it is currently priced to yield 8 per cent. The risk-free rate is 3 per cent, and the expected market return is 11 per cent. You have estimated that flinging has a beta of 1.2. If the corporate tax rate is 30 per cent, what is Flinging's WACC?



3 .Rocky Mountain Ltd is considering a project that will result in initial cash savinfs of $8 million at the end of the first year, and these savings will grow at the rate of 5 per cent per year indefinitely. The firm has a debt/equity ratio of 2.0 a cost of equity of 15 per cent, and an after-tax-cost of debt of 6 per cent. The cost-saving proposal is closely related to the firm's core business, so it is viewed as having the same risk as the overall firm. Under what circumstances should the firm take on the project?



4 .Parasols Ltd has compiled the following information on its financing costs.

Type of Financing     Book Value ($ million)      Market Value  ($million)     Before Tax Cost %

Long term debt                     10                                           7.5                                       9

Secured debt                         5                                           5.0                                       7

Paid-up capital                       15                                         17.5                                      15

                                                 30                                        30.0

Parasols is in a 30 per cent tax bracket and has a target debt/equity ratio of 100 per cent. It wants to keep its short-term debt at about half of its long-term debt (in market value terms)



a. Calculate the weighted average cost of capital for Parasols using (i) book value weights, (ii) market value weights and (iii) target weights.

b. Explain the difference in the results obtained in part (a) What are the correct weights to use in the weighted average cost of capital?

Answer rating: 100% (QA)

ANSWER 1 To calculate the WACC for Fullsome Corporation we need to first calculate the cost of equity and the cost of debt Cost of Equity Riskfree rate Beta Market Risk Premium 4 095 7 1065 Cost of De... View the full answer