Financial Managment

Part 1 – WACC

Part 1 has two sections:  1A and 1B.  For 1A, you will be valuing the debt and equity of a firm and then computing a WACC.  A firm can have many forms of debt, bonds, notes, long-term loans, etc.  When firms use a variety of debt instruments, all have to be considered in the WACC computation.  However, for this course, we are simplifying this calculation by limiting the debt of our firm to one bond calculation.  Also, to calculate the after-tax cost of debt, please assume our company has total business interest expense less than 30% of adjusted taxable income.  You may use the formula: AT kd = BT kd * (1 – ISTR).  To prepare for calculating the WACC, you will need to complete each step listed on the spreadsheet.  The final step is the calculation of the WACC.

For 1B, you will use the WACC you calculated to compute the payback, NPV, IRR, and MIRR of two Capital Budgeting Projects, then explain which projects should be accepted.

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Part 2-CAPM

For Part 2, you will compute a WACC  using the risk-adjusted method (CAPM) to determine the cost of equity.


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