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Finance – Cost of Capital – Worked examples Worked examples of different Cost of Capital Calculations for Finance Exam On the first three pages are the cost of capital questions – these just contain the information necessary for the cost of capital calculations. The solutions start on page 4. Company ungeared beta and WACC calculation 1. The risk free rate of interest is 5.35% and the market risk premium is 6.5%. The project will be funded 25% with debt and 75% with equity. The company has an asset beta of 1.1, and the debt beta is 0.2. The project is modest in proportion to the size of the company and it is in the same line of business and has the same financing proportions as the parent company. The tax rate is 30%. What is the WACC? Company and project ungeared betas and WACC calculation 2. Tax is 30% and is paid in the year of the cash flow. The parent company has an equity beta of 1.1 and has 25% of its total value financed by debt. The debt has a beta of 0.15. The project will be funded 35% with debt. The parent company’s revenues fluctuate by 1.05 times that of overall economic activity whereas with the project the volatility is 1.25 times that of economic activity. The project’s debt beta is 0.5. The risk free rate of interest is 5% and the stock market risk premium is 6%. What is the WACC? Company and project ungeared betas and WACC 3. XYZ has an equity beta of 1.4 and is financed 80% by equity and 20% by debt. The beta of debt is 0.1. The risk free rate of interest in the UK is 5% and the stock market risk premium is 6%. The UK company tax rate is 30%. The project will be financed with 40% debt and 60% equity. The beta of the debt for the project will be 0.25. The project will have fixed costs of 55% of cash flows, whereas the parent company has fixed costs of only 45% of cash flows. 1 Finance – Cost of Capital – Worked examples What is the WACC? Debt rate using Yield to Maturity, then WACC 4. Olympian plc is a quoted optical instrument company in

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