Task Week 14

1. Risk, Return and Security Market Line

Asset A: E(RA) = (0.4 * 30) + (0.6 * (-10)) = 6%

Variance(A) = 0.4 * (30 - 6)2 + 0.6 * (-10 - 6)2 = 384

Standard Deviation (A) = 19.6%

Asset B: E(RB) = (0.4 * (-5)) + (0.6 * 25) = 13%

Variance(B) = 0.4 * (-5 - 13)2 + 0.6 * (25 - 13)2 = 216

Standard Deviation (B) = 14.7%

Portfolio

Portfolio Return in Boom = (0.5 * 30) + (0.5 * (-5)) = 12.5

Portfolio Return in Bust = (0.5 * (-10)) + (0.5 * 25) = 7.5

Expected Return = (0.4 * 12.5) + (0.6 * 7.5) = 9.5

Variance of Portfolio = 0.4 * (12.5 - 9.5)2 + 0.6 * (7.5 - 9.5)2 = 6

Standard Deviation = 2.45%

 Portfolio Return in Boom: (0.6 * 15) + (0.4 * 10) = 13%

Portfolio Return in Normal: (0.6 * 10) + (0.4 * 9) = 9.6%

Portfolio Return in Recession: (0.6 * 5) + (0.4 * 10) = 7%

Expected Return = (0.25 * 13) + (0.6 * 9.6) + (0.15 * 7) = 10.06%

Variance = 0.25 * (13 - 10.06)2 + 0.6 * (9.6 - 10.06)2 + 0.15 * (7 - 10.06)2 = 3.6924

Standard Deviation = 1.92%

2. Weighted Average Cost of Capital

2.1. Millie Co. has a target capital structure of 60% common stock, and 40% debt. The cost of equity
is 12%, the cost of preferred stock is 5% and the pretax cost of debt is 7%. The tax rate is 35%.

a. What is Millie Co.’s WACC?

Wd = 40%

rd = 7%

t = 35%

We = 60%

re = 12%

WACC = (0.4 * 0.07) * (1 - 0.35) + (0.6 * 0.12) = 9.02%

b. The company president has asked you why the company doesn’t use more preferred stock
financing because it costs less than debt. What would you tell the president?

Saat menggunakan hutang sebagai pengganti biaya preferred, maka akan mendapatkan
keuntungan dari biaya bunga atas hutang, sebagai pengurang yang diperbolehkan untuk
perhitungan pajak penghasilan atau perusahaan. Selain itu, manfaat penggunaan sumber sebagai
hutang adalah biaya setelah pajak bagi perusahaan yang lebih kecil dari biaya saham preferred.

2.2. A corporation has 10,000 bonds outstanding with a 6% annual coupon rate, 8 years to maturity,
a $1,000 face value, and a $1,100 market price. The cost of debt is 4.48% The company’s 500,000
shares of common stock sell for $25 per share and have a beta of 1.5. The risk free rate is 4%,
and the market return is 12%.

Assuming a 40% tax rate, what is the company’s WACC?

Cost of Debt = 4.48%

Cost of Equity = Risk free rate + Beta * (Market risk - Risk free rate)

= 4% + 1.5 * (12% - 4%)

= 16%

Cost of Preferred = 1.5 / 30 = 5%

V=P+E+D = (100,000 * 30) + (500,000 * 25) + (10,000 * 1,100)

= 3,000,000 + 12,500,000 + 11,000,000

= 26,500,000

P/V = 1.5 / 26.5 = 0.0566

E/V = 12.5 / 26.5 = 0.4717

D/V = 11 / 26.5 = 0.4151

WACC = P/V * Rp + E/P * Re + D/P * Rd * (1 - Tc)

= 0.0566 * 5% + 0.4717 * 16% + 0.4151 * 4.48% * (1 - 40%)

= 0.0894

= 8.94%
3.
Santi sebaiknya menerima proyek tersebut karena dari keempat analisis keuangan, 3
diantaranya mengindikasikan Santi untuk menerima proyek.