Question: You are working as a Finance Manager at a large heavy machine manufacturer. You are preparing some key information for capital budgeting and structure purposes.

You are working as a Finance Manager at a large heavy machine manufacturer. You are preparing some key information for capital budgeting and structure purposes. You have received the following information;

About the Company
Debt-to-Equity Ratio: 1.55
Market Capitalization: INR750 crore
Market Value of Debt: INR423 crore
Company Stock Market Beta: 1.25
Market Risk Free Rate: 5%
Annual Return of Market (BSE Sensex): 15%
Tax Rate: 10%
Cost of Debt: 9%

Statistics of Assembly Line Machinery
Purchase Cost: INR60 crore
Sell Value (3 Years): INR42 crore
Sell Value (4 Years): INR35 crore
Annual Operating Costs (Years 1 to 3): INR4.5 crore
Annual Operating Costs (Year 4): INR7.5 crore
Discount Rate: WACC Rate%

Based on these given statistics, perform the all following functions below;

(1) Calculate the Company's Cost of Equity using the CAPM Model (Hint: All the Variables are Given)
(2) Calculate the Company's Weighted Average Cost of Capital (WACC) after estimating the Cost of Equity.
(3) Explain the importance of WACC and evaluate the company's WACC rate.
(4) Using the WACC as the discount rate, evaluate whether the company should replace assembly line machinery after Year 3 or after Year 4.

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1 To compute the Companys Cost of Equity we apply the Capital Asset Pricing Model CAPM with the given variables in their places The equation for CAPM is ER Rf Rm Rf Where ER denotes Expected Return Co... View full answer

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