Question

A Company has a total Debt of $500,000 and its Equity is $500,000. Short-term debt is 35.00% of its Total Debt and costing 8.0% while its Long-term debt is costing 6.0%. The cost of Equity is found using D1 = $2.00, Po = $20.00 while its growth is 2.0%. Find the Cost of Capital for the Company if the Corporate Tax is 45.00%.

Question 7 options:

	7.8742%
	9.2534%
	7.8425%
	8.8425%

A Company has a Cost of Capital of 25.25%, and has decided to invest into a new project costing $27,451. It expects the total cash flow to be in year 1 = $50,000, year 2 = -$5,000, year 3 = -$15,326, year 4 = $98,500 and the final year to be: -$40,000. Find the NPV of the project and decide if you should: Accept or Reject it.

Question 8 options:

	-$60,250.3287, Reject
	$60,250.3287, Accept
	-$28,529.4349, Reject
	$28,529.4349, Accept

Answer 1

Answer to Question 1.
Total Debt = $500,000

Short Term Debt = $500,000 * 35% = $175,000
Long Term Debt = $500,000 - $175,000 = $325,000
Equity = $500,000

Total Value of Firm = Short Term Debt + Long Term Debt + Equity
Total Value of Firm = $175,000 + $325,000 + $500,000
Total Value of Firm = $1,000,000

Weight of Short Term Debt = $175,000 / $1,000,000
Weight of Short Term Debt = 0.1750

Weight of Long Term Debt = $325,000 / $1,000,000
Weight of Long Term Debt = 0.3250

Weight of Equity = $500,000 / $1,000,000
Weight of Equity = 0.5000

After Tax Cost of Short Term Debt = 8% * (1 – 0.45)
After Tax Cost of Short Term Debt = 4.40%

After Tax Cost of Long Term Debt = 6% * (1 – 0.45)
After Tax Cost of Long Term Debt = 3.30%

Cost of Equity = D1 / P0 + g
Cost of Equity = $2.00 / $20.00 + 0.02
Cost of Equity = 0.12 or 12%

Cost of Capital of Company = (Weight of Short Term Debt * After Tax Cost of Short Term Debt) + (Weight of Long Term Debt * After Tax Cost of Long Term Debt) + (Weight of Equity * Cost of Equity)
Cost of Capital of Company = (0.1750 * 4.40%) + (0.3250 * 3.30%) + (0.5000 * 12.00%)
Cost of Capital of Company = 7.8425%

Answer to Question 2.