Quiz_ Quiz 6_ Weighted Average Cost of Capital WACC - Attempt 1 (Answers)

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25/03/2023, 15:18 Quiz 6: Weighted Average Cost of Capital WACC: BUSI 370 202 2022W2 Business Finance https://canvas.ubc.ca/courses/105711/quizzes/570491 1/12 Quiz 6: Weighted Average Cost of Capital WACC Due Mar 26 at 11:59p.m. Points 35 Questions 35 Available until Apr 22 at 11:59p.m. Time Limit None Allowed Attempts 3 Instructions Attempt History Attempt Time Score LATEST Attempt 1 2,955 minutes 19 out of 35  Answers will be shown after your last attempt Score for this attempt: 19 out of 35 Submitted Mar 25 at 2:44a.m. This attempt took 2,955 minutes. For this Quiz answer the questions using excel or financial calculator. ( I recommend using an spreadsheet for your calculations. You may be allowed to use either a calculator or excel to solve similar problems on the mid term and final exams ). You have 3 attempts on this quiz, highest score counts. There is no time limit. The correct answers will be available the next day. Your answers should be accurate to the nearest cent (unless advised otherwise) for all monetary amounts and to 4 decimal places in Canvas (set your calculator to six decimal places) for all other answers (unless advised otherwise). Do NOT use unit symbols ($,%), spaces or commas in your fill in the blank answers . It is highly recommended that you document (write or type) your answers to the question showing the equations used and the calculator steps followed in a separate document. This will allow you to check your work against the assignment answers in Canvas and assist you in future studying for the midterm and final exams. For complex problems, it is also useful to draw a timeline to modeling the cash flows. Take the Quiz Again 1 / 1 pts Question 1 Blast Corp. is an all-equity firm. The company is expected to have constant earnings of $3.75 per share per annum for the foreseeable future (in perpetuity). If Blast’s cost of equity is 8%, and there are currently 7 million shares outstanding, Calculate the value per share. Do NOT use units, spaces or commas in your answers. 46.875 Value per Share Value : 1 / 1 pts Question 2 Blast Corp. is an all-equity firm. The company is expected to have constant earnings of $3.75 per share per annum for the foreseeable future (in perpetuity). If Blast’s cost of equity is 8%, and there are currently 7 million shares outstanding, Calculate the estimated market value of the firm's equity. Do NOT use units, spaces or commas in your answers. 328,125,000

25/03/2023, 15:18 Quiz 6: Weighted Average Cost of Capital WACC: BUSI 370 202 2022W2 Business Finance https://canvas.ubc.ca/courses/105711/quizzes/570491 2/12 Market value equity (E) = Share Price x number of shares outstanding (n) = E = P x n = $46.88 X 7 Million Shares = $328,125,000 Note: the book uses S to denote the value of equity; E is also commonly used to denote equity 1 / 1 pts Question 3 Using the CAPM, calculate the cost of equity (ke) for Bono Corp. where the Bank of Canada 1 year yield for T-Bills is estimate for the risk-free rate (RF), Bono Corp’s beta is equal to 1.43, and an expected market return (ERm) of 9%? 1. Research the risk free rate: Go to: http://www.bankofcanada.ca/rates/interest-rates/t-bill-yields/ (http://www.bankofcanada.ca/rates/interest-rates/t- bill-yields/) Part 1: Select the Rate from Treasury bill average yields - 1 year 2020-03-03 Do NOT use units, spaces or commas in your answers. 1.2 T-bill average yield from 2020-03-03 = 1.20% =0.012 0 / 1 pts Question 4 Incorrect Incorrect Using the CAPM, calculate the cost of equity (ke) for Bono Corp. where the Bank of Canada 1 year yield for T-Bills is estimate for the risk-free rate (RF), Bono Corp’s beta is equal to 1.43, and an expected market return (ERm) of 9%? 1. Research the risk free rate: Go to: http://www.bankofcanada.ca/rates/interest-rates/t-bill-yields/ (http://www.bankofcanada.ca/rates/interest-rates/t- bill-yields/) Part 2: Calculate Bono Corp's Cost of Equity using the CAPM to 4 decimal places. Do NOT use units, spaces or commas in your answers. 12.354 Use the CAPM equation to solve for ke Note: (ER –RF) is also known as the market risk premium 1 / 1 pts Question 5 Calculate Zee Company’s weighted average cost of capital (WACC). Assume that the market values of Zee Company’s equity and debt are $4,600,000 and $2,400,000 respectively. The cost of debt (before tax) is 6%. The company is not publically

25/03/2023, 15:18 Quiz 6: Weighted Average Cost of Capital WACC: BUSI 370 202 2022W2 Business Finance https://canvas.ubc.ca/courses/105711/quizzes/570491 3/12 traded, but similar companies listed on the TMX stock exchange have a beta of 1.25. Assume that the market risk premium is equal to 8.5%. The tax rate is 30% and the risk free rate (RF) is equal to 2.0%. Part 1: Calculate the market value of the firm. Do NOT use units, spaces or commas in your answers. 7,000,000 Solve for V when E and D are given in the question V = D +E Where: E = market value of the firm’s equity and D = market value of the firm’s debt D = the market value of the firm’s D debt which is also denoted as B in the textbook V = $4,600,000 + $2,400,000 = $7,000,000 1 / 1 pts Question 6 Calculate Zee Company’s weighted average cost of capital (WACC). Assume that the market values of Zee Company’s equity and debt are $4,600,000 and $2,400,000 respectively. The cost of debt (before tax) is 6%. The company is not publically traded, but similar companies listed on the TMX stock exchange have a beta of 1.25. Assume that the market risk premium is equal to 8.5%. The tax rate is 30% and the risk free rate (RF) is equal to 2.0%. Part 2: Calculate the ratio of equity to value (E/V) to 4 decimal places Do NOT use units, spaces or commas in your answers. 0.6571 E/V = $4.6M/$7M = 0.657143 1 / 1 pts Question 7 Calculate Zee Company’s weighted average cost of capital (WACC). Assume that the market values of Zee Company’s equity and debt are $4,600,000 and $2,400,000 respectively. The cost of debt (before tax) is 6%. The company is not publically traded, but similar companies listed on the TMX stock exchange have a beta of 1.25. Assume that the market risk premium is equal to 8.5%. The tax rate is 30% and the risk free rate (RF) is equal to 2.0%. Part 3: Calculate the ratio of debt to value (D/V) to 4 decimal places Do NOT use units, spaces or commas in your answers. 0.3429 D/V = $2.4M/$7M = 0.342857 Alternatively D/V = (1.00 – E/V) so 1.00 - 0.6557143 = 0.342857 1 / 1 pts Question 8 Calculate Zee Company’s weighted average cost of capital (WACC). Assume that the market values of Zee Company’s equity and debt are $4,600,000 and $2,400,000 respectively. The cost of debt (before tax) is 6%. The company is not publicly

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25/03/2023, 15:18 Quiz 6: Weighted Average Cost of Capital WACC: BUSI 370 202 2022W2 Business Finance https://canvas.ubc.ca/courses/105711/quizzes/570491 4/12 traded, but similar companies listed on the TMX stock exchange have a beta of 1.25. Assume that the market risk premium is equal to 8.5%. The tax rate is 30% and the risk free rate (RF) is equal to 2.0%. Part 4: Calculate k to 4 decimal places Do NOT use units, spaces or commas in your answers. 0.1263 1 / 1 pts Question 9 Calculate Zee Company’s weighted average cost of capital (WACC). Assume that the market values of Zee Company’s equity and debt are $4,600,000 and $2,400,000 respectively. The cost of debt (before tax) is 6%. The company is not publically traded, but similar companies listed on the TMX stock exchange have a beta of 1.25. Assume that the market risk premium is equal to 8.5%. The tax rate is 30% and the risk free rate (RF) is equal to 2.0%. Part 5: Calculate k to 4 decimal places Note: K (1-T) = after tax cost of debt which is also denoted as k Do NOT use units, spaces or commas in your answers. 0.042 K = K * (1-T) = 0.06 *(1-0.3) = 0.042 1 / 1 pts Question 10 Calculate Zee Company’s weighted average cost of capital (WACC). Assume that the market values of Zee Company’s equity and debt are $4,600,000 and $2,400,000 respectively. The cost of debt (before tax) is 6%. The company is not publically traded, but similar companies listed on the TMX stock exchange have a beta of 1.25. Assume that the market risk premium is equal to 8.5%. The tax rate is 30% and the risk free rate (RF) is equal to 2.0%. Part 6: Calculate ZEE Company’s WACC to 4 decimal places Do NOT use units, spaces or commas in your answers. 0.0974 WACC = k (E/V) + k (1-T) (D/V) WACC = 0.657143 * 0.12625 + 0.342857 * 0.042 = 0.09736430 1 / 1 pts Question 11 What is the cost of issuing new equity for Happy Corp. if the issuing (floatation) costs are equal to 6% (6% of the share price, after tax). Assume that the stock is currently worth $15.00 per share. The company just paid a $0.85 dividend per share. The dividend is expected to growth at 5.3% per year for the foreseeable future (forever). Calculate to 4 decimal places. Do NOT use units, spaces or commas in your answers.

25/03/2023, 15:18 Quiz 6: Weighted Average Cost of Capital WACC: BUSI 370 202 2022W2 Business Finance https://canvas.ubc.ca/courses/105711/quizzes/570491 5/12 0.0669 Cost of new equity: (K ) use the DDM model except instead of price (P ) use Net Proceeds (NP) Where: NP = P * (1-floatation costs (F)) = P *(1 – F) (in this case F is after tax) 1 / 1 pts Question 12 XYZ Corp. is considering an investment in Project Maverick. This new project requires a $11,000,000 initial investment and will produce annual net after tax cash flows according to the following pro forma: This project will be financed internally. The project is as risky as the firm’s current operations. The market values of the firm’s equity and debt are $56 million and $44 million respectively. Part 1: Using the CAPM method, calculate the cost of equity. Do NOT use units, spaces or commas in your answers. 0.1673 1 / 1 pts Question 13 Part 2: Using the CAPM method, calculate the WAAC. Do NOT use units, spaces or commas in your answers. 0.1143

25/03/2023, 15:18 Quiz 6: Weighted Average Cost of Capital WACC: BUSI 370 202 2022W2 Business Finance https://canvas.ubc.ca/courses/105711/quizzes/570491 6/12 WACC = k = k = [ ( B / V )× k ]+ [ (E / V) × k ] k = [ (1 – 0.56) x 0.046875 ] + [ 0.56 × 0.1673 ] = 0.114312 or 11.4313% 1 / 1 pts Question 14 Part 3: Using the CAPM method, calculate the NPV of this investment. Do NOT use units, spaces or commas in your answers. -61,659.36 Calculate NPV using WACC by the CAPM method = I/Y Generic steps calculator steps 0 / 1 pts Question 15 Incorrect Incorrect Part 4: Calculate the Cost of Debt. Do NOT use units, spaces or commas in your answers. 0.0625 I = Bond PMT = k * Face Value of the Bond; Where: k = Risk Free rate (RF) + Premium k = [ (1 – Tax rate) × I ] / Net Proceeds bonds (NP ); Where: NP = Face Value of the Bond (B) * (1-Floatation costs (F)) in this case F = 0 k =[ (1 – T) × I ] / NP Note: k = the rate of return bond investors (i.e. the market) requires on these bonds k = the after tax cost of the debt to the firm (k is used in the calculation of WACC since the interest paid on bonds is tax deductible). Another method of solving for k is to use the Yield to Maturity (YTM) equation (see Q. 6) 1 / 1 pts Question 16

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25/03/2023, 15:18 Quiz 6: Weighted Average Cost of Capital WACC: BUSI 370 202 2022W2 Business Finance https://canvas.ubc.ca/courses/105711/quizzes/570491 7/12 Part 5: Using the DDM method, calculate the cost of equity. Do NOT use units, spaces or commas in your answers. 0.1643 Calculate Cost of Equity using the DDM method k = (D / P ) + g = [(1.85 x (1+0.05))/15] + 0.05 = 0.164265 or 16.4265% 1 / 1 pts Question 17 Part 6: Using the DDM method, calculate the WAAC. Do NOT use units, spaces or commas in your answers. 0.1126 Calculate WACC= k Where k is the cost of equity using the DDM method k = [ ( B / V )× k ]+ [ (E / V) × k ] k = [ (1 – 0.56) x 0.046875 ] + [ 0.56 × 0.164265 ] = 0.112613 or 11.2613% e 0 / 1 pts Question 18 Incorrect Incorrect Part 7: Using the DDM method, calculate the NPV of the investment. Do NOT use units, spaces or commas in your answers. -7,008.96 Calculate NPV using WACC by the DDM method = I/Y Generic steps calculator steps I/Y = WACC Enter CF0, CF1, CF2, CF3, CF4, CF5, CF6 Calculate NPV Cost of Raising New Capital (Marginal Cost of Capital MCC) Pür Copper Corp. is a publicly traded company listed on the TMX. The company has 20,000,000 common shares outstanding and current stock price is $30 per share.

25/03/2023, 15:18 Quiz 6: Weighted Average Cost of Capital WACC: BUSI 370 202 2022W2 Business Finance https://canvas.ubc.ca/courses/105711/quizzes/570491 8/12 According to Pür Copper’s balance sheet as at December 31 20XX: Pür Copper’s has retained earnings of $25,700,000 Pür Copper has $200,000,000 preferred shares outstanding paying a 5.3% annual dividend. These preferred shares are owned by one of the company’s main clients, TokyoTelecom, as part of a long-term strategic partnership. This partnership involves Pür Copper’s commitment to supply TokyoTelecom with a certain quantity of copper at a certain price each year (these prices and quantities are revised regularly according to an agreed schedule). Pür Copper has $300,000,000 of outstanding debt (bonds) paying a 5.5% annual coupon. These bonds were issued at par (face value = $1000) 2 years ago and have a remaining term to maturity is 8 years The firm’s corporate tax rate is 30%. Pür Copper is considering investing in a new project that will require external financing. The project is as risky as the existing operations of the firm. Given current market circumstances, Pür Copper could raise new equity and debt under the following conditions: Comparable 8 year corporate bonds issued at par are currently yielding 6.40% per annum. Thanks to its long-term agreement with TokyoTelecom, Pür Copper’s bonds are perceived as less risky than similar corporate bonds. Therefore, the yield required by potential investors is 30 basis points lower than the yield required for other comparable corporate bonds. A 2.75% (after tax) underwriting fee (floatation costs) applies to new bond issues. Pür Copper could issue new common shares at 5% discount from the current market price per share. Existing shareholders expect a 19.9% return on their investment. New preferred shares could be issued with 5.9% yield. After tax issuing and underwriting fees are equal to 6.3% of par value. Remember 1% = 100 basis points What is Pür Copper Corp.’s marginal cost of capital (MCC)? Step 1: Calculate the cost to the firm for k , k and k Note: Calculate the k in order to solve for the market value of the debt Step 2: Find the market values of B, P and E Step 3: Solve for the weights: B/V, P/V and E/V Step 4: Calculate the MCC Note: MCC = WACC for the next dollar raised (for a given capital structure) Answer the next 17 Questions st i p e i 0 / 1 pts Question 19 Incorrect Incorrect Calculate the Cost of Debt k (after tax and after flotation costs) Calculate the Coupon Rate for New Bonds: Do NOT use units, spaces or commas in your answer. i 0.0566 Coupon rate (new bonds) = comparable bond rates +/- risk premium/discount 0 / 1 pts Question 20 Incorrect Incorrect Calculate the after tax annual coupon payment: Do NOT use units, spaces or commas in your answer. 0.0396

25/03/2023, 15:18 Quiz 6: Weighted Average Cost of Capital WACC: BUSI 370 202 2022W2 Business Finance https://canvas.ubc.ca/courses/105711/quizzes/570491 9/12 Annual coupon (before tax) = I = B x coupon rate Annual coupon (after tax) = I *(1-Tax rate) 0 / 1 pts Question 21 Incorrect Incorrect Calculate the net proceeds from the new bonds Do NOT use units, spaces or commas in your answer. 291,750,000 Net Proceeds = NP = B * (1 –floatation costs) 0 / 1 pts Question 22 Incorrect Incorrect Solve for the firm’s after tax cost of debt k Do NOT use units, spaces or commas in your answer. i 0.448 Use the YTM equation from Chapter 6 0 / 1 pts Question 23 Incorrect Incorrect Calculate the Cost of Preferred Equity k Calculate the Preferred Dividend D Do NOT use units, spaces or commas in your answer. p p 11,800,000 D = P * Preferred Dividend rate p p 0 / 1 pts Question 24 Incorrect Incorrect Calculate the Net Proceeds from issuing new preferred shares Do NOT use units, spaces or commas in your answer. 18,740,000

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25/03/2023, 15:18 Quiz 6: Weighted Average Cost of Capital WACC: BUSI 370 202 2022W2 Business Finance https://canvas.ubc.ca/courses/105711/quizzes/570491 10/12 NP = Par Value x (1 – issuing costs) P 1 / 1 pts Question 25 Calculate the cost of Preferred Equity (k ) to 4 decimal places Do NOT use units, spaces or commas in your answer. p 0.0629 k = D / NP = 0.059 / 0.9370 = 0.062967 =6.2967% p p p 1 / 1 pts Question 26 Calculate the Cost of New Common Equity k Calculate the Net Proceeds per share NP Do NOT use units, spaces or commas in your answer. ne e 28.5 NP = P x (1-discount) =$30.00x (1 -0.05) = $28.50 e 0 0 / 1 pts Question 27 Incorrect Incorrect Calculate the cost of new common equity k (to 4 decimal places) Do NOT use units, spaces or commas in your answer. ne 0.1396 k = (P / NP ) * k ne 0 e e 0 / 1 pts Question 28 Incorrect Incorrect Calculate the Market Value Debt B to the nearest cent Do NOT use units, spaces or commas in your answer. 55,044,876.79 B = Market Value per Bond x Number of Bonds Outstanding

25/03/2023, 15:18 Quiz 6: Weighted Average Cost of Capital WACC: BUSI 370 202 2022W2 Business Finance https://canvas.ubc.ca/courses/105711/quizzes/570491 11/12 0 / 1 pts Question 29 Incorrect Incorrect Calculate the Market Value Preferred Equity P to the nearest cent Do NOT use units, spaces or commas in your answer. 187,400,000 P = Dp/kp x number of preferred shares outstanding 0 / 1 pts Question 30 Incorrect Incorrect Calculate the Market Value Common Equity E to the nearest cent Do NOT use units, spaces or commas in your answer. 570,000,000 E = P x number of shares outstanding Note: the value of retained earnings is incorporated into the current market price of equity. 0 0 / 1 pts Question 31 Incorrect Incorrect Calculate the market value of the firm to the nearest cent Do NOT use units, spaces or commas in your answer. 812,444,876.79 V = B + P + E 0 / 1 pts Question 32 Incorrect Incorrect Step 3: Solve for the weights: B/V, P/V and E/V Calculate the Bond to Value B/V weight to 4 decimal places Do NOT use units, spaces or commas in your answer. 0.0678 Calculate B/V 1 / 1 pts Question 33

25/03/2023, 15:18 Quiz 6: Weighted Average Cost of Capital WACC: BUSI 370 202 2022W2 Business Finance https://canvas.ubc.ca/courses/105711/quizzes/570491 12/12 Calculate the Preferred Equity to Value P/V weight to 6 decimal places Do NOT use units, spaces or commas in your answer. 0.2307 P/V = 179,661,016.95 /1,068,527,492.38= 0.168139 0 / 1 pts Question 34 Incorrect Incorrect Calculate the Equity to Value E/V weight to 6 decimal places Do NOT use units, spaces or commas in your answer. 0.7016 Calculate E/V 1 / 1 pts Question 35 Step 4: Calculate the MCC Note: MCC = WACC for the next dollar raised (for a given capital structure) Calculate the MCC to 4 decimal places 0.1428 Quiz Score: 19 out of 35

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Quiz_ Quiz 6_ Weighted Average Cost of Capital WACC - Attempt 1 (Answers)

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