Financial Management Assignment: UTas, Week 10 Problems

This document presents a comprehensive solution to a Financial Management assignment, addressing practical problems related to bond pricing and Weighted Average Cost of Capital (WACC). The assignment begins with calculating the price of a bond, determining the number of bonds to be issued to raise a specific amount, and computing the after-tax cost of debt. The solution then progresses to a more complex scenario involving Wagon Corporation, where the WACC is calculated to determine a project's discount rate. This includes detailed calculations of the market value of debt and equity, the cost of equity using the Capital Asset Pricing Model (CAPM), and the debt and equity weights used in the WACC formula. The document provides step-by-step explanations, making it a valuable resource for students studying financial management. The solution also includes the calculation of the market price of the bond and the firm's market value.

Financial Management 1
FINANCIAL MANAGEMENT
By (Student’s Name)
Professor’s Name
College
Course
Date

Financial Management 2
FINANCIAL MANAGEMENT
Question 1
Part a
Coupon is semi-annually paid. Thus, the period remains semi-annual.
The bond price is computed using the present value using excel as follows.
Inputs:
Rate= required rate per period= semi-annual required rate= 10 percent/2
= 5 percent
Period = numbers of half-year in time to maturity=2 by 5
= 10
The Payment per period= PMP= semiannual coupon= (8 percent/2)* 1000
= 40
Future value=FV= face value
=1000
Thus, bond price, P= PV (Rate, Period, PMT, FV)
= -PV (5%, 10, 40, 1000)
= 922.78 dollars

Financial Management 3
Bond numbers to be issued, N= Amount to be raised/P
= 500,000/922.78= 542.
NB: The number of bonds to be issued has been rounded off to the nearest integer.
Part b.
The firm-after taxed cost of debt
= required return x (1-tax rate)
=10 percent x (1-30%)
=7 percent.
Question 2
Debt:
Face Value (FV) = 1,000 dollars
Annual coupon rate (ACR) = 9%
Semiannual Coupon Rate (SCR) = 4.5%
Semiannual Coupon (SC) = 4.5% * 1,000 dollars
SC= 45 dollars
Time to Maturity = ten years
Semiannual Period to maturity =10*2= 20
Annual YTM= 10.00 percent
Semiannual YTM = 5.00 percent
Before-tax cost of debt= 10.00 percent

Financial Management 4
After-tax cost of debt = 10.00% x (1-0.30)
= 7.00 percent
Market Price
Market Price (MP) = 45 dollars x PVIF (5.00 percent, 20) + 1000 dollars x PVIF (5.00 percent,
20)
MP= 45 dollars x (1-(1/1.05 ^20)/0.05 + 1000 dollars/ 1.050 ^20
MP= 937.69 dollars
Bond numbers outstanding = 1000
Market Value of Debt= Bond Numbers Outstanding x MP
= 937,690 dollars
Equity:
Shares Number Outstanding= 200,000
MP = 20 dollars
Equity Market Value = 200,000 x 20 dollars
= 4 000 000 dollars
Equity Cost = Risk-free Rate + Beta x (Market Return- Risk-free Rate)
Equity Cost= 4.00 percent + 0.95 x (15.0 percent less 4.0 percent)
= 14.45 percent

Financial Management 5
Firm Market Value
Firm Market Value= Debt Market Value + Common Stock Market Value
= (937 690 + 4000000)
= 4,937, 690 dollars
Debt Weight = 937 690 dollars/ 4937690 dollars
= 0.18990
Equity Weight = 4000000 dollars/ 4937690
= 0.81010
WACC
WACC = Debt Weight x After-tax Debt cost + Equity Weight x Equity Cost=
0.18990 x 7.0 percent + 0.81010 x 14. 45 percent
= 13.040 percent