Finance problems Speech or Presentation Example | Topics and Well Written Essays - 2000 words

Finance problems - Speech or Presentation Example What is the component cost of debt for use in the WACC calculation? Tapley Inc. recently hired you as a consultant to estimate the company’s WACC. You have obtained the following information. (1) Tapleys bonds mature in 25 years, have a 7.5% annual coupon, a par value of $1,000, and a market price of $936.49. (2) The company’s tax rate is 40%. (3) The risk-free rate is 6.0%, the market risk premium is 5.0%, and the stock’s beta is 1.5. (4) The target capital structure consists of 30% debt and 70% equity. Tapley uses the CAPM to estimate the cost of equity, and it does not expect to have to issue any new common stock. What is its WACC? Wagner Inc estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept? The Nunnally Company has equal amounts of low-risk, average-risk, and high-risk projects. Nunnally estimates that its overall WACC is 12%. The CFO believes that this is the correct WACC for the company’s average-risk projects, but that a lower rate should be used for lower risk projects and a higher rate for higher risk projects. However, the CEO argues that, even though the company’s projects have different risks, the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources. If the CEO’s opinion is followed, what is likely to happen over time? Since according to the CEO’s opinion all projects, whether risky or non-risky, should be evaluated by using the average WACC therefore the riskier project’s cash flows would be discounted by using a lower WACC as a result the firm will accept too many risky projects. Similarly, low risk project’s cash flows would be discounted by using a higher WACC which will reject too many low-risk projects. Percy Motors has a target capital