MBA-520 Accounting and Financial Analysis Assignment- Southern New Hampshire University
Module Guidelines
verview: For this task, you will explain the importance of cost of capital to organizational success and work through some calculations to understand their value.
Prompt: First, review the module resources, especially Chapter 11 in the textbook. Then, address the following:
- Answer the following questions based on your organization chosen for the final project. Write your response in a separate Microsoft Word document:
o Importance of Cost of Capital: Why is cost of capital important to an organization, and what does it measure?
o Meaning of Calculations: How do organizations calculate various costs, and what do these calculations mean to business?
- After completing the written portion, calculate answers to the problems in the worksheet.
Module Worksheet
Prompt: After reviewing the data in the table, respond tothe problems below. Indicate the answer you believe is correct.
Zonk Corporation Data
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Total assets
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$7,460
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|
Interest-bearing debt
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$3,652
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Average pretax borrowing cost
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10.5%
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|
Common equity:
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|
Book value
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$2,950
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|
Market value
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$13,685
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Income tax rate
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35%
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Market equity beta
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1.13
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Question 1:Assuming that the riskless rate is 2.3% and the market premium is 5.3%, calculate Zonk's cost of equity capital:
A. 10.4%
B. 7.69%
C. 11.89%
D. 8.28%
Question 2: Determine the weight on debt capital that should be used to calculate Zonk's weighted-average cost of capital:
A. 21.7%
B. 21%
C. 50%
D. 58.2%
Question 3: Determine the weight on equity capital that should be used to calculate Zonk's weighted-average cost of capital:
A. 79%
B. 78.3%
C. 41.8%
D. 50%
Question 4: Using the above information, calculate Zonk's weighted-average cost of capital:
A. 11.5%
B. 7.97%
C. 7.48%
D. 10.90%
Question 5: Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the revised equity beta for Zonk based on the new capital structure.
A. 4.35
B. 4.34
C. 2.84
D. 3.91
Question 6: Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the weighted average cost of capital for Zonk based on the new capital structure.
A. 8.85%
B. 12.56%
C. 13.01%
D. 9.94%
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.