1) Total book value of WTC’s equity is= $20 million and book value per share outstanding is= $10. The stock of WTC is presently selling for a price of= $25 per share and beta of WTC is= .85. The bonds of WTC have face value of $36 million and sell at price of 96% of face value. Yield to maturity on bonds is 6.5% and firm’s tax rate is 35%. If the E(Rm) = 8% and Rf = 1%, compute the WACC of WTC.
2) Assume the company in 1 is considering given expansion projects. How would you compute the needed rate of return to use in NPV analysis of the following: Describe.
(a) Company is considering the expansion to double production of its present product. Company can issue equity or it can issue debt yielding 7% to pay for expansion.
(b) Company is considering adding the new product in different line of business which is unrelated to their current product.