THE COST OF CAPITAL Below you will find the exercises you will need to do this week Three. Please answer the following questions and submit via the Assignment Box by Sunday midnight. Read the evaluation criteria for the assignment and follow the instructions before submitting to obtain the maximum grade. 

1) What is the Weighted Average Cost of Capital (WACC) and how is it calculated? Present and interpret the formula. 

2) What is the main benefit of debt financing? How does an over-indebtedness affect corporate value and can it nullify the benefit derived from the tax shield? 

3) What are the benefits, costs and risks of an aggressive financing strategy and a conservative financing strategy? 

4) How is the optimal WACC (WACC) determined? Explain your answer. 

5) Calculate the WACC of the Cacao del Pacifico company based on the following data and say what possible aspects could improve this opportunity cost or cost of capital: 

Passives / Actives: 55% Net Worth / Assets: 45% Average cost of liabilities: 9.57% Corporate tax rate: 40% 5-year US Treasury risk-free rate: 2.88% Market rates: 10.5% Beta of the Cacao del Pacfico share: 0.80.

Answer rating: 100% (QA)

WACC is calculated by taking a weighted average of the cost of equity and the cost of debt where the weights are the proportion of equity and debt in ... View the full answer