Given that a company’s risk-free rate is 1%, the S&P 500 average return is 6%, and a firm has a beta of 0.8, compute the Weighted Average Cost of Capital for the firm given that the firm can borrow...

Given that a company’s risk-free rate is 1%, the S&P 500 average return is 6%, and a firm has a beta of 0.8, compute the Weighted Average Cost of Capital for the firm given that the firm can borrow from the bank at (on average) an interest rate of 4%. The balance sheet shows that there is $300 million of shareholder equity, and $100 million of long-term debt. Problem 2 The same company as the firm in Problem 1 (i.e.


Long Island University - Southampton College Problem 1 Given that a company’s risk-free rate is 1%, the S&P 500 average return is 6%, and a firm has a beta of 0.8, compute the Weighted Average Cost of Capital for the firm given that the firm can borrow from the bank at (on average) an interest rate of 4%. The balance sheet shows that there is $300 million of shareholder equity, and $100 million of long-term debt. Problem 2 The same company as the firm in Problem 1 (i.e. assume the WACC that you have computed above) is now contemplating the following project that will generate the following cash flows: Year12345 Cash flow1212447 The initial investment is 33 (all number are $ millions). Should the firm proceed with the investment? Does it make a difference if there is uncertainty regarding the cash flows: there is only an 85% chance that the cash will be realized. Assume that the cash flows are reduced by 15% accordingly.