Integrative Case This case draws on material from Chapters 11-13. You work for Hydro Tech, a large manufacturer of high-pressure The firm specializes in natural disaster services, rangi a large manufacturer of high-pressure industrial water pumps. es in natural disaster services, ranging from pumps that draw water from lakes, ponds, and streams in drought-stricken areas to pumps that remove umes in flooded areas. Your ken areas to pumps that remove high water vol- as. You report directly to the CFO. Your boss has asked you to calculate myuro rechs WACC in preparation for an expensive retreat Too bad you re no m e and skiing are on the agenda in Sun Valley, Idaho. At least you have an analyst on hand to gather the following required information: 1. The risk-free rate of interest. in this case, the yield of the 10-year government which is 3% 2. HydroTech's: a. Market capitalization (its market value of equity), $100 million b. CAPM beta, 1.2 c. Total book value of debt outstanding. $50 million d. Cash, $10 million 3. The cost of debt (using the quoted yields on HydroTech's outstanding bond issues), which is 5% With this information in hand, you are now prepared to undertake the analysis. Case Questions 1. Calculate HydroTech's net debt. 2. Compute HydroTech's equity and (net) debt weights based on the market value of equity and the book value of net debt. 3. Calculate the cost of equity capital using the CAPM, assuming a market risk pre- mium of 5%. 4. Using a tax rate of 35%, calculate Hydro Tech's effective cost of debt capital. 5. Calculate HydroTech's WACC. 6. When is it appropriate to use this WACC to evaluate a new project? 431