Question

Shi Import-Export's balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi's tax rate is 40%, r_d = 7%, r_ps = 8.1%, and r_s = 11%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC? Round your answer to two decimal places.

Suppose you manage a $4.09 million fund that consists of four stocks with the following investments:

Stock	Investment		Beta
A	$400,000		1.50
B	650,000		-0.50
C	940,000		1.25
D	2,100,000		0.75

If the market's required rate of return is 13% and the risk-free rate is 5%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

%

Answer 1

ANSWER

Calculation of Weighted Average Cost of Capital (WACC)
Type of Capital	Proportion	Cost of Capital %
A	B	C	B * C
Debt	30%	4.20%	1.26%
Preferred Stock	5%	8.1%	0.40%
Common equity	65%	11%	7.15%
Weighted Average Cost of Capital			8.81%
Working
After tax cost of debt = rd * (1-tax rate) = 7% * (1-0.40) = 4.20%

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Stock	Investment	weights [Investment/4090000]	Beta	weighted beta
A	400,000	.098	1.50	.147
B	650,000	.159	-.50	-.0795
C	940,000	.230	1.25	.2875
D	2,100,000	.513	.75	.3847
Weighted beta				.7397

Fund required rate of return (CAPM) =Risk free rate +Beta (Return on market -risk free rate)

                                                     = 5 + .7397(13-5)

                                                     = 5 + 5.9176

                                                     =10 .9176 or 10.91 %

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