## Answers

rate positively ..

Rate of equity = | |||||||||

Using CAPM rate of equity = Risk free rate + market risk premium * beta | |||||||||

=5%+8%*1.3 | |||||||||

15.40% | |||||||||

Rate of debt (after tax) | |||||||||

we have to use financial calculator to compute YTM | |||||||||

Put in calcualtor | |||||||||

PV | -1110 | ||||||||

FV | 1000 | ||||||||

PMT | 1000*5.2%/2 | 26 | |||||||

N | 15*2 | 30 | |||||||

Compute I | 2.10% | ||||||||

YTM =2.1%*2 | 4.20% | ||||||||

tax rate = | 22% | ||||||||

therefore rate of debt (after tax) = 4.2%*(1-22%) | 3.28% | ||||||||

rate of debt (after tax) = | 3.28% | ||||||||

Working for rest of question | |||||||||

Computation of Weight and WACC | |||||||||

Market value | weight | Cost of capital | weight * cost | ||||||

Source | |||||||||

equity | 368000000 | =9200000*40 | 47.94% | 15.40% | 7.38% | ||||

debt | 399600000 | =360000*1000*111% | 52.06% | 3.28% | 1.71% | ||||

Total | 767600000 | 9.09% | |||||||

ans a) | market value capital structure | ||||||||

Debt = | 52.06% | ||||||||

Equity= | 47.94% | ||||||||

ans b) | firm should WACC computed above. | ||||||||

WACC = | 9.09% |

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