TLTK_Chương 8: Risk and the Cost of Capital

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EX1: 

a) Corporation A has a beta of the stock of 1.1 and a debt-to-equity ratio of 0.3. The market rate of return is 13 percent, the tax rate is 35 percent, and the risk-free rate is 3 percent. The pre-tax cost of debt is 9 percent. What is the WACC?

b) Company B has a weighted average cost of capital of 9.8 percent. The company’s cost of equity is 13 percent, and its cost of debt is 6.5 percent. The tax rate is 35 percent. What is the company’s debt–equity ratio?

EX2: The total market value of the common stock of the company B is 600 million VND, and the total value of its debt is 500 million VND. The beta of the stock is currently 1.3 and that the expected risk premium on the market is 8%. The Treasury Bill rate is 3% and the cost of debt after tax is 6.5%. What is the WACC? (Tax rate is 30%).

EX3: Calculate WACC if the tax rate is 20%. Know that:

Capital Structure

40%

Bond

The 10-year annual coupon bond that has a coupon rate of 9% with a face value of $1,000 and its current price is $1,308.

60%

Common stock

The risk-free rate is 2%, the expected market risk premium is 8%, and the beta of the company’s common stock is 0.5.

EX4: Corporation T went public by issuing 2,000,000 shares of common stock at 10,000 VND per share. The shares are currently trading at 55,000 VND per share. Current risk free rate is 6% and market risk premium is 8% and the company has a beta coefficient of 1.2. During last year, company T issued 500,000 bonds, the face value of bonds is 1,000,000 VND per bond and the bonds are currently trading at 800,000 VND per bond. If the tax rate is 35%, the cost of debt is 12%. What is the WACC?

EX5: A levered firm has a target capital structure of 20 percent debt and 80 percent equity. The aftertax cost of debt is 6 percent, the tax rate is 35 percent, and the cost of equity is 14 percent. The firm is considering a project that is equally as risky as the overall firm. The project has an initial cash outflow of 3 billion VND and annual cash inflows of 400 million VND at the end of each year for six years. What is the NPV of the project?