week 6 fin 534

Week 6 Discussion

COLLAPSE

Weighted Average Cost of Capital (WACC)

  • Create a unique hypothetical weighted average cost of capital (WACC) and rate of return. Recommend whether or not the company should expand, and defend your position.
  • I also need for you to complete a response to a student …The Formula for Weighted Average Cost of Capital is:WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-T)]E = Market value of the company’s equity = $600,000D = Market value of the company’s debt = $400,000V = Total Market Value of the company (E + D) = (600,000 + 400,000) = 1,000,000Re = Cost of Equity = .06Rd = Cost of Debt = .05T= Tax Rate = 35%Now we can calculate TFCs weighted average cost of capital (WACC).WACC = ((600,000/$1,000,000) x.06) + [(($400,000/$1,000,000) x .05) * (1-0.35))] = 0.049 = 4.9%TFC’s weighted average cost of capital is 4.9%, which means that for every $1 TFC raises from investors, it must pay its investors almost $0.05 in return leaving TFC with $0.95 of each dollar invested to be used for the purchase of buildings, equipment, and inventory. Yes, TFC should expand.
 
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