Question

5. Shi Importer'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%, Ka-6 % , Kps 5.8% and Kc, preferred stock, and 65% common stock, what is its WACC? 12%. If Shi has a target capital structure of 30% debt, 5% 6. In the spring of last year, Tempe Steel learned that the firm would need to reevaluate the company's weight average cost of capital following a significant issue of debt. The firm now has financed 45 percent of its asset using debt and 55 percent using equity. Calculate the firm's weight average cost of capital where the firm borrowing rate on the debt is 8 percent, it faces a 40 percent tax rate, and a common stock holders require a 20 percent rate of return.

Answer 1

Q.5

WACC before changes in capital structure:-

source amounts 11 12 Equity 13 Debt wieght cost capital wieghted cost 250 0.416666667 12 300 1.8 50 0.083333333 5.8 0.483333333 600 0.5 3.6 14 Preference total 16 17 18 WACC 7.283333333 19
formulas used

wieghted cost :- E12=D12*C12

WACC :- =SUM(E12:E14)

• WACC After changes in capital structure:-

​​​​​​
wieght 11 12 source Equity Debt Preference total 0.65 0.3 cost capital wieghted cost 12 7.8 1.08 5.8 0.29 3.6 0.05 14 15 16 17 18 WACC 9.17 19 20

All the same formulas are used

Q.6

All the same formulas are used

6 8 9 10 wieght cost capital 12 source Equity Debt 20 0.55 0.45 wieghted cost 11 2.16 4.8 14 15 total 1 16 17 18 WACC 13.16 19

Note:-

cost of Debt is calculated by deducting tax rate

for ex. In

Q.5

it was 6% so we did 6*(1-t)= 6(0.6)= 3.6

Q.6

it was 8% so we did 8(1-t) = 8(0.6) = 4.8

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