Formatting: Market Value: answer is in millions (to two decimal places). For example, if you're given that there are 10 mil shares outstanding at a price of $50 each, the market value of equity is $500.00 mil, not $500,000,000 Cost of Capital: cost of capital (be it for debt or equity individually, or WACC as a whole) is a % and should be entered as a % (to two decimal places). For example, if the cost of debt is 4.50%, enter this as 4.50, not 0.045. Note: canvas accepts a range of answers and the decimal places you enter don't matter. For example, suppose the answer to a question were to be 3.253%. The typical acceptable range would be +/-0.01 (3.263% - 3.243%). If you input 3.25%, its in the range, so it works. You don't get a question wrong just for failing to input to a specified number of decimal places. Section One: Easy (5 points each) Suppose our company has the following capital structure, and a 35% Effective Tax Rate. Suppose that the risk-free rate is 2% and the expected return of the market is 14%. Compute the WACC for the company. Capital Amount Outstanding Market Level YTM of 4.00% Debt $500 mil Notional Amount of 4%% 10yr Bonds Corresponding to a Bond Price of 104.088 Bond Value $520.44 mil (104.088% . $500 mil) Trading at $50 per common share with Beta 1.15 Common Equity 10 mil shares outstanding, no dividend Therefore, Equity Value $500 mil (10 mil shares $50 per share) 1 What is the market value of debt capital? This is Din the WACC equation. 2 What is the market value of common equity capital? This is in the WACC equation. 3 What is the market value of all capital (i.e. sum of debt & equity capital)? This is the sum of D&E in the WACC equation. 4 What is the pre-tax cost of debt capital? This is io in the WACC equation. 5 What is the after-tax cost of debt capital? This is io. (1 - Tc) in the WACC equation, 6 What is the cost of equity capital? This is it in the WACC equation. 7 What is WACC for the company