Unit 5c Cost of Capital
T7.1SOLUTION
Part A
After-tax Weight Contribution
Component
Cost (%) (%) (%)
Equity 21.00% 0.60 12.60%
Debt 11.00% 0.40 4.40%
Total 100 17.00%
Part B
The 20% expected return of the project is greater than 17% WACC (required rate of return);
Provided that risk of project is similar to the risk of company as a whole, I would accept the
project under consideration.
T 7.2
Total market value =R2.00/20% R 10.00
A =R6.2/R10 62.00%
B =14*62% 8.68%
C =R10-R2-R6.2 R 1 800 000.00
D =R1.80/R10 18.00%
E =7.5*20% 1.50%
T7.1SOLUTION
Part A
After-tax Weight Contribution
Component
Cost (%) (%) (%)
Equity 21.00% 0.60 12.60%
Debt 11.00% 0.40 4.40%
Total 100 17.00%
Part B
The 20% expected return of the project is greater than 17% WACC (required rate of return);
Provided that risk of project is similar to the risk of company as a whole, I would accept the
project under consideration.
T 7.2
Total market value =R2.00/20% R 10.00
A =R6.2/R10 62.00%
B =14*62% 8.68%
C =R10-R2-R6.2 R 1 800 000.00
D =R1.80/R10 18.00%
E =7.5*20% 1.50%
