WACC and Capital Budgeting

Calculation of WACC

WACC = wD*rD(1-t) + wP*rP + wE*rE

w = The respective weight of debt, preferred stock/ equity and the equity in total capital structure

t = Tax Rate

D = Cost of Debt

P = Cost of preffered stock / Equity

E = Cost of Equity

WACC = 0.606(0.0431)(1-.40) + 0.394 (0.2165)

WACC = 10.10 %

WORKING :

1. Income Tax Rate Calculation :

Income tax expense = $2,696,000

Income before tax = $6,674,000

Income Tax rate = Income tax expense / Income before tax

Income Tax rate = ($2,696,000 / $6,674,000) x 100

Income Tax rate = 40.39%

2. Calculation of Rate of Debt:

Calculation of Rate of Debt = Interest Expense / Long term debt

Calculation of Rate of Debt = $1,220,000 / $28,293,000

Calculation of Rate of Debt = 4.31%

3. Calculation of Rate of Equity:

Calculation of Rate of Equity = Net Income / Equity

Calculation of Rate of Equity = $3,978,000 / $18,375,000

Calculation of Rate of Equity = 21.65 %

4. Calculation of Weights:

Total Capital = Debt + Equity

Total Capital = $46,668,000

Long term debt = $28,293,000

Weight of Debt (wD) = Long Term Debt / Total Capital

Weight of Debt (wD) = $28293,000 / $46,668,000

Weight of Debt (wD) = 0.606

Share holder's Equity = $18,375,000

Weight of Equity (wE) = Share Holder's Equity / Total Capital

Weight of Equity (wE) = $18,375,000 / $46,668,000

Weight of Equity (wE) = 0.394

Calculation of NPV and IRR

WACC 10%

0 1 2 3 4 NPV IRR

Project A -100,000 50,000 30,000 30,000 20,000

Project B -250,000 100,000 100,000 50,000 50,000

Project C -500,000 400,000 50,000 50,000 50,000

Discount Factor 1 0.9090 0.8264 0.7513 0.6830

Project A -100,000 45,454.55 24,793.39 22,539.44 13,660.27 6,447.65 13.45%

Project B. -250,000 90,909.09 82,644.63 37,565.74 34,150.67 -4,729.87 8.99%

Project C. -500,000 363,636.36 41,322.31 37,565.74 34,150.67 -23,324.91 6.49%

Analysis

From the calculation above on the WACC and Capital Budgeting, NPV, and IRR. What analysis will you make to the senior financial manager and CFO?