Weighted Average Cost of Capital-A publicly owned company
Subject: Business / Finance
Question
Part I: Weighted Average Cost of Capital
A publicly owned company, RD Incorporated has a Debt Ratio of 55%
The debt has an annual interest rate on the financing of 6.5%
The firm has a corporate tax rate of 30%
The equity position (cost) is determined by the Capital Asset Pricing Model. Currently the
market has the following:
Risk Free Rate = 3.75%
S&P 500 Market return = 10.5%
RD Incorporated’s Beta = 1.85
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Please determine the firm’s current WACC.
Part II: Capital Budget Analysis
The firm has a project decision to make, as a finance analyst you have been asked to
approve or reject the project.
Here are the following project inputs:
Equipment Investment = $500,000
Term of the project = Ten Years
WACC = from Part I
Annual Net Operating Cash Flow = $85,000
Please determine the Net Present Value (NPV), Internal Rate of Return (IRR), Profitability
Index (PI) and the years Payback of this project.
Would you reject or approve of the project?
