Comprehensive WACC Analysis for Advance Manufacturing Company

This assignment provides a detailed, step-by-step calculation of the Weighted Average Cost of Capital (WACC) for Advance Manufacturing. It begins by calculating the cost of equity using the CAPM model, incorporating the risk-free rate, beta, and market risk premium. Next, it determines the cost of debt by finding the Yield to Maturity (YTM) of the company's outstanding bonds. The market values of both equity and debt are computed, which are then used to determine their respective weights in the capital structure. Finally, the WACC is calculated by combining the weighted costs of equity and debt, resulting in a comprehensive analysis of the company's overall cost of capital. Desklib offers more solved assignments and past papers to help students in their academic journey.

WACC COMPUTATION
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COST OF EQUITY
The cost of equity computation can be carried out using the CAPM model.
Cost of Equity = Risk free rate + Beta * Market Risk Premium
In the given case, risk free rate = 3.5%, beta = 1.3, market risk premium = 7%
Hence, cost of equity = 3.5% + 1.3*7% = 12.6%
COST OF DEBT
In the given case, the YTM (Yield to Maturity) needs to be determined for the bonds issued
by the company.
Current price of bond = 97% *1000 = $ 970
Coupon rate = 9%
Par value = $ 1000
The YTM would be the discount rate at which the present value of the future cashflows
would be $ 970. This is estimated using the table below.
Hence, YTM = 9.38%

Post tax cost of debt = 9.38%*(1-0.35) = 6.1%
WEIGHT COMPUTATION
Market value of equity = Current value of one common stock * Common stock outstanding =
50 * 8.2 million = $ 410 million
Market value of debt = Current price of one bond * Outstanding bonds = (97% *1000)*
200,000 = $ 194 million
Weight of equity = (410/(410+194))= 0.6788
Weight of debt = (194/(410+194)) = 0.3212
WACC COMPUTATION
WACC = Weight of equity * Cost of equity + Weight of debt * After tax cost of debt =
0.6788*12.6% + 0.3212 *6.1% = 10.51%