Part 1 10 MARKS

You are the Financial Analyst of Fred & Co which has the following Equity information ( 50 million shares, $80 per share, Beta = 1.15, Market risk premium = 9%, Risk-free rate = 5%). In addition the treasurer just provided you with the following debt information ($1 billion in outstanding debt (face value), Current quote = 110, at a cost of 7.85%. Fred & Co have a corporate Tax rate of 40%.

Required

You are required to calculate the following

a. What is the cost of equity? 3 Marks

b. What is the after-tax cost of debt? 1 Marks

c. What are the capital structure weights? 4 Marks

d. What is the WACC? 2 Marks

Part 2 5 MARKS

Consider the following statement by a financial manager: "Since we are financing our new manufacturing facility 100% with equity, we must evaluate it using a higher rate of return than we would if we financed a portion of the facility with debt." Do you agree? Why or why not? Be sure to fully explain the rationale behind your argument