# You are working as a Finance Manager at a large heavy machine manufacturer. You are preparing some

## 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 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.

**Related Book For**

## Financial Reporting Financial Statement Analysis and Valuation a strategic perspective

ISBN: 978-1337614689

9th edition

Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw