1. WACC. Eric has another get-rich-quick idea, but needs funding to support it. He chooses an all-debt funding scenario. Eric will borrow $2,000 from Wendy, who will charge him 6% on the loan. He will also borrow $1,500 from Bebe, who will charge 8% on the loan, and $800 from Shelly, who will charge 14% on the loan. What is the weighted average cost of capital for Eric?
18. Adjusted WACC. Thorpe and Company is currently an all-equity firm. It has 3 million shares selling for $28 per share. Its beta is 0.85, and the current risk-free rate is 2.5%. The expected return on the market for the coming year is 13%. Thorpe will sell corporate bonds for $28,000,000 and retire common stock with the proceeds. The bonds are twenty-year semiannual bonds with a 10% coupon rate and $1,000 par value. The bonds are currently selling for $1,143.08 per bond. When the bonds are sold, the beta of the company will increase to 0.95. What was WACC of Thorpe and Company before the bond sale? What is the adjusted WACC of Thorpe and Company after the bond sale if the corporate tax rate is 40%? (Hint: The weight of equity before selling the bond is 100%).
22. Beta of a Project. Vespucci is adding a project to the company portfolio and has the following information: the expected market return is 12%, the risk-free rate is 5%, and the expected return on the new project is 10%. What is the beta of the project?
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