Question

The following data applies to Micro Advanced Developers (MAD).

Debt	Equity
market value of debt = $253,946	market value of equity = $398,965
time to maturity of debt = 6 years	risk free rate = 3.9% pa
coupon rate = 5.0% pa paid semi-annually	market risk premium = 7.4% pa
face value = $300,000	DDD beta = 1.06

As a financial manager you have been given the task of calculating the company's weighted average cost of capital (WACC). Ignore the effect of taxes.

a)Firstly, you realise that the cost of debt is needed. Calculate the cost of debt for MAD. You may give your answer as a percentage per annum to the nearest percent or use linear interpolation or a financial calculator to give a more accurate result.

Cost of debt =  % pa

b)Secondly, the cost of equity must also be identified. Calculate the cost of equity for MAD. Give your answer as a percentage per annum to 1 decimal place.

Cost of equity =  % pa

c)Finally, calculate the weighted average cost of capital for MAD. Give your answer as a percentage per annum to 1 decimal place.

Weighted average cost of capital =  % pa

Answer 1

a)	Market Value of debt =$253946
	Coupon rate = 5% p.a semi annually
	Face Value = $ 300000
	Coupon Amount	7500
	Time to maturity = 6 years
	There is a inverse relation between interest and price
	As the market value in this case is less than face value, then the interest rate should be more than 5 %
	Let the cost of debt = 8% pa semi annually
	Price = Coupon Amt*PVAF (r, 12) + Face value*PVIF( r,12)
	7500 PVAF(4%,12)+ 300000*PVIF(4%,12)
	7500*9.385+ 300000*0.625
		257887.5
	Let the cost of debt = 8.3%
	Price = Coupon Amt*PVAF (r, 12) + Face value*PVIF( r,12)
	7500 PVAF(4.15%,12)+ 300000*PVIF(4.15%,12)
		$253946
	Cost of Debt = 8.3%
b)	Risk free return(Rf)= 3.9%
	Market Risk Premium(Rm)=7.4%
	Beta(b) =1.06
	Cost of Equity =	Rf + Rm * b
		3.9+ 7.4*1.06
	Cost of Equity =	11.74%
					(weight*rate)
c)	Capital	Value	Weight	Rate	WACC
	Equity	398965	0.61	8.3	5.1
	Debt	253946	0.39	11.74	4.6
	Total	652911			9.6
		WACC = 9.6%