NAME: IAN KIPROP

REGISTRATION NO: D61/33617/2019

UNIT NAME: Corporate Finance

UNIT CODE: DFI 601

TASK: ASSIGNMENT
 Question 1

Given Data:

EBIT 500,000

Book Value of Equity 1,500,000

Market Value of Equity 6,000,000

Outstanding Debt 1,000,000

Interest Cost 80,000

Cost of Debt - Book Value 8.0%

Based on Rating Profile 8.25%

Peer: Beta Factor 1.05

Question (a)

Debt Equity Ratio Weight%

Outstanding Debt 10,00,000 40%
Book Value of Equity 15,00,000 60%
Debt Equity Ratio 0.67

Cost of Equity:
EBIT 500,000
Less: Interest 80,000
EBT 420,000
Less: Tax 0
Net Income 420,000
Book Value of Equity 1,500,000
Cost of Equity 28.00%

Beta Factor 1.05

Beta Adjusted Cost of Equity 29.40%

Weight% Weighted Cost %

Cost of Debt 8.25% 40% 3.300%
Beta Adjusted Cost of Equity 29.40% 60% 17.640%

Weighted Average Cost of Capital 20.940%

(WACC)

EBIT 5,00,000
 WACC 20.940%
Value of Firm 23,87,775

QUESTION (b)

Debt Equity Ratio: Weight%

Outstanding Debt 20,00,000 57%
Book Value of Equity 15,00,000 43%
Debt Equity Ratio 1.33

Weight% Weighted Cost %

Cost of Debt 9.00% 57% 5.143%
Beta Adjusted Cost of Equity 29.40% 43% 12.600%
Weighted Average Cost of Capital
(WACC) 17.743%

EBIT 5,00,000
WACC 17.743%
Value of Firm 28,18,035
Question 2

Company WACC Computation

Equity Market Value = Shares O/s * Market Price

= 100 M * 15

= $1500 M

Debt Market Value = $500 M

Equity Cost = Risk Free rate + Beta * (Market rate - Risk Free rate)

= 8% * 1.25 * 8%

= 18.00%

Debt Cost = Interest Rate * (1 - tax rate)

= 12% * 50%

= 6%

WACC = Equity Weight * equity Cost + Debt Weight * Debt Cost

= (1500M / 2000M) * 18% + (500M / 2000M) * 6%

= 15%

Project A, B and C should be considered by the company for investment because there
capital tax return is more than 15%

Part a

In this case, the stockholders should get a refund from the company because its project
requirements are lower than funds to be invested.
Part b

Stockholders Amount paid = Funds Invested - Investment requirement of Project A, B and C

= $100 M - $50 M

= $50 M