Question
There were no solutions available for the Part 4 Integrative Case from the Fundamentals of Corporate Finance 4th Edition by Berk, DeMarzo and Harford. Could
There were no solutions available for the Part 4 Integrative Case from the "Fundamentals of Corporate Finance" 4th Edition by Berk, DeMarzo and Harford. Could anyone help with solving the Case Questions below based on the information provided?
Base Information:
1. The risk-free rate of interest, in this case, the yield of the 10-year government bond, 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 Hydro Tech'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 CAPM, assuming a market risk premium of 5%.
4. Using a tax rate of 35%, calculate HydroTech'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?
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