Question
The Albeit Asitis Corporation is known for the high quality of its Snirfel Sprocket Inverters internationally. It has undertaken to expand recently and requires your
The Albeit Asitis Corporation is known for the high quality of its Snirfel Sprocket Inverters internationally. It has undertaken to expand recently and requires your assistance in determining first the Weighted Average Cost of Capital, and the determination of a capital budget for the purchase of a new machine which is expected to last about seven years.
To determine the WACC, the following information is helpful:
The calculation is done based on total debt, short and long term, for which the company pays 9%, and the Tax Rate is 25%.
The company will determine the cost equity using the CAPM model, which is based on the following information:
Standard deviation of the market 5.00%
Standard deviation of Albeit - 7.00%
Covariance 43.75
T-bond rate 3 month - 3.00%
Expected Market return - 12.00%
The Balance Sheet looks like this:
Calculate the WACC of the firm and explain what it is used for. How would you tell the owners how this figure will help them?
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