Weighted average cost of capital for commarts


Question 1. Diamond, Inc. only sells 1 carat diamond rings for $5,000.  The cost of the diamonds is $2,200 per carat.  Store rent is $2,000 per month and a commission is paid to the salesperson for each $1,000 ring sold.  Fixed salaries amount to $20,000 per month.

How many rings must be sold to break-even each month?

How many rings need to be sold in order to make $50,000?

Question 2. Using the Capital Asset Pricing Model (CAPM) calculate the expected rate of return for CommArts, Inc.

Risk free Rate of Return = 4%
Market Rate of Return =   12%
CommArts, Inc. Beta =    1.5

3.  Calculate the Weighted Average Cost of Capital for CommArts, Inc. using the information below and the result of your answer in question 2.

CommArts, Inc.

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

 

Dec. 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

1,000,000

 

Curent Liabilities

1,000,000

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt 8%

10,000,000

Property, Plant & Equip.

25,000,000

 

Equity

 

15,000,000

 

 

26,000,000

 

 

 

26,000,000


Additional Information:  Market value of Equity is $16 million and the marginal tax rate is 38%.

Solution Preview :

Prepared by a verified Expert
Finance Basics: Weighted average cost of capital for commarts
Reference No:- TGS02037939

Now Priced at $25 (50% Discount)

Recommended (97%)

Rated (4.9/5)