firm gets 100% of its capital from common stock. The equity holder’s required rate of return is 10% and the firm’s tax rate is 0%. The project involves an immediate investment of $13,000 for the purchase and installation of equipment. The equipment will be depreciated straight-line, over 4 years, down to a salvage value of $ 0. The project is expected to generate operating cashflows [=ebit(1-t)+dep] in the amount of $4,200 at the end of each of the next four years. Assume that at the end of the fourth year the related equipment is sold which generates an additional after-tax cashflow of $1,800. What is the weighted average cost of capital (WACC)? What are the total cashflows for each
The firm gets 100% of its capital from common stock. The equity holder’s required
What is the weighted average cost of capital (WACC)?
What are the total cashflows for each year (please indicate positive or negative)?
1) Weighted Average cost of capital
= ( weight of equity * cost of equity) + ( weight of debt * cost of debt )
As, firm is 100% financed by equity, WACC is equal to cost of equity.
So, WACC of firm is 10%
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