PLEASE WRITE IT OUT, NO EXCEL

Q$4)$ a$)$ Dimond $7$ has been operating an excavation company in British Columbia for the last $20$ years.Q$4)$ a$)$ Dimond $7$ has been operating an excavation company in British Columbia for the last $20$ years.

The company has been successful in generating revenue and free cash flows $($FCF$).$ The company is

planning to replace $7$ excavators. The supplier will trade in old excavators and will deduct $$95,000$ from

the total purchase price of new excavators. Each new excavator will cost $$175,000.$

The corporate tax rate is $35\%.$ The company beta $({}_A)$ is $1\mathrm{.}45,$ risk$-$free return $(R_f)$ is $4\mathrm{.}25\%,$ and the

expected rate of return on market portfolio is $9\%.$ Based on the risk, the bank will charge $7\mathrm{.}45\%$ on the

commercial loans$/$chattel mortgages granted for excavators. The company will use $60\%$ equity financing

and $40\%$ debt financing.

Based on the above information, please calculate the WACC. Please show all the calculations by which

you came up with the final answer. $(3$ Points$)$

b$)$ Another excavation company called Diamond $12$ has $50,000$ shares of common stock outstanding with

a market price of $$50$ per share. It has $1,500$ bonds outstanding, each selling for $$1,350.$ The bonds

mature in $15$ years, have a coupon rate of $8\%($i$.$e$.,$ the cost of debt for WACC$),$ and pay coupons

annually. The firm's beta is $2\mathrm{.}35,$ the risk$-$free rate is $3\mathrm{.}85\%,$ and the expected rate of return on market

portfolio is $10\%.$ The tax rate is $40\%.$

Based on the above information, please calculate the WACC. Please show all the calculations by which

you came up with the final answer. $(3$ Points$)$

c$)$ Based on your analysis and findings $($Questions: a & b$),$ which company has higher risk $($Dimond $7$ or

Diamond $12)$ and higher cost of capital? Why? How would you define business and financial risk? Where

do business and financial risk come from? Please explain your reasoning. $(2$ Points$)$

The company has been successful in generating revenue and free cash flows $($FCF$).$ The company is

planning to replace $7$ excavators. The supplier will trade in old excavators and will deduct $$95,000$ from

the total purchase price of new excavators. Each new excavator will cost $$175,000.$

The corporate tax rate is $35\%.$ The company beta $($A$)$ is $1\mathrm{.}45,$ risk$-$free return $($Rf$)$ is $4\mathrm{.}25\%,$ and the

expected rate of return on market portfolio is $9\%.$ Based on the risk, the bank will charge $7\mathrm{.}45\%$ on the

commercial loans$/$chattel mortgages granted for excavators. The company will use $60\%$ equity financing

and $40\%$ debt financing.

Based on the above information, please calculate the WACC. Please show all the calculations by which

you came up with the final answer. $(3$ Points$)$

b$)$ Another excavation company called Diamond $12$ has $50,000$ shares of common stock outstanding with

a market price of $$50$ per share. It has $1,500$ bonds outstanding, each selling for $$1,350.$ The bonds

mature in $15$ years, have a coupon rate of $8\%($i$.$e$.,$ the cost of debt for WACC$),$ and pay coupons

annually. The firm's beta is $2\mathrm{.}35,$ the risk$-$free rate is $3\mathrm{.}85\%,$ and the expected rate of return on market

portfolio is $10\%.$ The tax rate is $40\%.$

Based on the above information, please calculate the WACC. Please show all the calculations by which

you came up with the final answer. $(3$ Points$)$

$6$

c$)$ Based on your analysis and findings $($Questions: a & b$),$ which company has higher risk $($Dimond $7$ or

Diamond $12)$ and higher cost of capital? Why? How would you define business and financial risk? Where

do business and financial risk come from? Please explain your reasoning. $(2$ Points$)$