SOLUTIONS
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for FAC MAC ECS DSC TAX QMI
FIN INV BNU STA tutorials
, QUESTION 1: Cost of Capital and Capital Budgeting
1.1 Calculate the WACC associated with each range of financing/break-point.
Cost of Debt (Debentures):
Component Value Calculation
Face value R1,000
Coupon rate 8%
Issue price R950 R1,000 × (1 - 0.05)
Flotation cost R20
Net proceeds R930 R950 - R20
Annual interest R80 R1,000 × 0.08
[R80 + (R1,000 -
Before-tax cost 9.02% R930)/10]/[(R1,000 +
R930)/2]
After-tax cost 6.31% 9.02% × (1-0.3)
Other Financing Costs:
Source Cost
Bank loan (after-tax) 10%
Retained earnings 14.10%
New equity 14.45%
Step 2: Calculate the break points
Break point Amount (R) Calculation
Debentures 400,000 R160,000/0.4
OSCAR THE TUTOR
+27737560989
for FAC MAC ECS DSC TAX QMI
FIN INV BNU STA tutorials
, QUESTION 1: Cost of Capital and Capital Budgeting
1.1 Calculate the WACC associated with each range of financing/break-point.
Cost of Debt (Debentures):
Component Value Calculation
Face value R1,000
Coupon rate 8%
Issue price R950 R1,000 × (1 - 0.05)
Flotation cost R20
Net proceeds R930 R950 - R20
Annual interest R80 R1,000 × 0.08
[R80 + (R1,000 -
Before-tax cost 9.02% R930)/10]/[(R1,000 +
R930)/2]
After-tax cost 6.31% 9.02% × (1-0.3)
Other Financing Costs:
Source Cost
Bank loan (after-tax) 10%
Retained earnings 14.10%
New equity 14.45%
Step 2: Calculate the break points
Break point Amount (R) Calculation
Debentures 400,000 R160,000/0.4
