a) Sungsam Corporation, a US-based conglomerate, is considering expanding its operations in India. As the group's chief financial officer, you are asked to estimate the firm's weighted average cost of capital. Sungsam has 1 million shares of common stock outstanding with a market price of $12 per share. The firm's outstanding annual coupon bonds have ten years to maturity, a face value of $5 million ($1000 per bond), a coupon rate of 10% and are priced at $1,000. The risk-free rate is 7% and analysts' expected return for the market is 14%. Sungsam's stock has a beta of 1.2 and the firm is in the 34% tax bracket. What is the firm's WACC?
a) Sungsam Corporation, a US-based conglomerate, is considering expanding its operations in India. As the group's chief financial officer, you are asked to estimate the firm's weighted average cost of capital. Sungsam has 1 million shares of common stock outstanding with a market price of $12 per share. The firm's outstanding annual coupon bonds have ten years to maturity, a face value of $5 million ($1000 per bond), a coupon rate of 10% and are priced at $1,000. The risk-free rate is 7% and analysts' expected return for the market is 14%. Sungsam's stock has a beta of 1.2 and the firm is in the 34% tax bracket. What is the firm's WACC?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![[Each part is independent.]
a)
Sungsam Corporation, a US-based conglomerate, is considering expanding its operations in
India. As the group's chief financial officer, you are asked to estimate the firm's weighted
average cost of capital.
Sungsam has 1 million shares of common stock outstanding with a market price of $12 per
share. The firm's outstanding annual coupon bonds have ten years to maturity, a face value of
$5 million ($1000 per bond), a coupon rate of 10% and are priced at $1,000. The risk-free rate
is 7% and analysts' expected return for the market is 14%. Sungsam's stock has a beta of 1.2
and the firm is in the 34% tax bracket.
What is the firm's WACC?
When the project's risk is not the same as the average risk of the company's existing projects,
how should the company cost of capital be used in the NPV analysis for the project?
b)
c)
Sungsam is a conglomerate consisting of an electronics division and a shipping division. The
performance of the electronics division fluctuates a great deal with the state of the economy
while the performance of the shipping division tends to be more steady. If Sungsam uses its
WACC to evaluate all investment projects, how would this influence the acceptance or
rejection of projects in the two divisions?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F0cb8d3f7-2c85-474e-9eb1-a174ec91c788%2Fd928968e-ba92-43d9-b905-8c443ecb5ee7%2Feswhcxk_processed.jpeg&w=3840&q=75)
Transcribed Image Text:[Each part is independent.]
a)
Sungsam Corporation, a US-based conglomerate, is considering expanding its operations in
India. As the group's chief financial officer, you are asked to estimate the firm's weighted
average cost of capital.
Sungsam has 1 million shares of common stock outstanding with a market price of $12 per
share. The firm's outstanding annual coupon bonds have ten years to maturity, a face value of
$5 million ($1000 per bond), a coupon rate of 10% and are priced at $1,000. The risk-free rate
is 7% and analysts' expected return for the market is 14%. Sungsam's stock has a beta of 1.2
and the firm is in the 34% tax bracket.
What is the firm's WACC?
When the project's risk is not the same as the average risk of the company's existing projects,
how should the company cost of capital be used in the NPV analysis for the project?
b)
c)
Sungsam is a conglomerate consisting of an electronics division and a shipping division. The
performance of the electronics division fluctuates a great deal with the state of the economy
while the performance of the shipping division tends to be more steady. If Sungsam uses its
WACC to evaluate all investment projects, how would this influence the acceptance or
rejection of projects in the two divisions?
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