HomeWork 5

Details:

E
New Annual Coupon rates:6%
bonds
Flotation Costs:1.5%
of amount issue

Maximum
debt/equity ratio:0.8

Tax rate :30%

WACC:?

Inc:
Digger
Current Dividend:$1.65 X/E 0.6
=

"Sustainable"Dividend Growth Rate:6% Tax rate 25% =

Stock Price:$18.45 Cost of Debt (R 6%

=

(pretax)

Skyreach Inc:

Beta 1.7
=

Ry 2%
=

D/E 0.9
=

Expected Market Return 10.65% =

Tax 20% =
Cost of Debt (KG 8%. =

Levered Cost of Equity K==

(Digger) widend Growth Rate
-

=
0.06
+
=
0.14943

=
14.943%o

Untevered Cost of Equity -> RE RE

=

(RE
+ -

ka) x (1-5) E
x

14.943= kE (k=
+ -

6) x(1-0.25) x 0.6

14.943 RE
=

20.45K:-2.7)
+

17.643 k=
=
0.45KE
+

K =12.158%
=
 K Rf
= +
(Market Return -

R1)
12.168 2
=
+

B(10.65 -
2)
10.168 B(8.65)
=

&
(8)
= 1175
=

Sky Reach, ha

B +
Bu
0Fos*
0.900
=
=

Bu
Industry average =>
u
=+1 1.082
=

Leveraged beta for Predators (B) Unlevered beta for Predators

=

(Bu) X (1+(1 i) 2]
- x

1,082
=

x[1 (1
+
-

0.3x08]
1.688
=

Cost of Equity (ke) => 2 1.658(10.65-2)

+

= 16.60 Y

Cost of Debt(k() 6%
=

D/E 0.8
=

:Wp
=0.1444,
=
We=D-Ohuru
0.5556
=
WACL [k,
=

x Wix (1 -

53] [W=
+ x KE)
=[0.n44x6x.x(1-0.3)] + [0.5556 x16.6;]
=11.09%

WACC
of Predators is 11.09%