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Assume that a firm has no debt in its capital structure. It has expected NOI of sh.100,000 and equity capitalization rate Ke of 10%. Since it is all equity financed, WACC = cost of equity(Ke) i.e 10% Required: Determine the value of the firm Question 2: Assume the firm in question 1 is able to change its capital structure replacing equity by debt of sh.300,000. The cost of debt is 5% Determine i. The value of the firm ii. The WACC Question 3. Suppose the firm uses more debt in place of equity and increases debt to sh.900,000. Cost of debt is 5%. Ke= 10% and NOI is sh.100,000 Determine the value of the firm and the firm’s WACC

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Hubert Koch
Hubert KochLv2
28 Sep 2019

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You are provided the following information:

Debt $ 90000

Equity $ 90000

The shares trade at $ 10; the growth rate is 10%. Dividends last year were $ 1.00. The firm has a 40% tax rate.

$ 100 face value, 30 year, 8% coupon bonds trade at par.

1 What is the weighted average cost of capital (WACC) ?

2 What is the WACC if the CFO decides on changing the capital structure to 60% debt and 40% equity?

3 What happens to WACC if the capital structure changes to Debt 40% and 60% equity?

4 What can you say about WACC?

Rollins Corporation is estimating its WACC. It’s current and target capital structure is 40 percent debt and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,040. Rollins' beta is 1.2, and the risk-free rate is 10 percent. Rollins is a constant-growth firm which just paid a dividend of $2.00. Its stock sells for $27.00 per share, and has a growth rate of 8 percent. The firm's marginal tax rate is 40 percent.

Question 4) If the floatation cost for debt is 5% and the floatation cost for equity is 15%, what is the weighted average cost of capital (WACC) for new funds?

Question 5) Given the floatation costs in question 4 above, how much capital, debt and equity, does the firm have to raise to receive $10 million?

A firm has the following capital structure: £100 million ofequity (market value) with 100 million shares outstanding, and £100million of debt. The beta of the firm’s stock is 1.6. The firm’scost of equity is 10 percent, and the yield on riskless bonds is 2percent. There is no tax. Assuming that the firm can borrow at therisk-free rate and that both CAPM (Capital Asset Pricing Model) andthe Modigliani-Miller theorem hold, answer the following questions.i) What is the share price of the firm? ii) What is the WACC of thefirm? iii) What should be the expected return on the marketportfolio? iv) Suppose the firm changes its capital structure sothat its debt increases to £140 million, and the equity decreasesby £60 million. What should be the firm’s cost of equity after thechange?

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