ASSIGNMENT
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2 SEMESTER
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lh.L QUESTIONS Fl!ILLvi ANf WERED
1
DUE: 1ef sEfPTEMBER 2d2 s
DISCLAIMER:
THI$ DtjCUMENT IS FDR REFERENCE AND GUI f'NqE PURP SES
ONLY. I DD NDTtTAKE RESPDNSIBILIITY jFDR A~Y PLAGIARl~M. ~MISUS • DR
ACADEMIC MISCONDUCT RESULTING FROM TH131R USE. IT IS YOUR ~
RELEVt T GUlr LINES DR r Tt DAr Di . l l
RESPIJNSIBILl_!i T_! ENSU E ORIGINALITY ANq CDMPLIAN E WITH
, PLEASE USE THIS DOCUMENT AS A GUIDE TO ANSWER YOUR ASSIGNMENT
QUESTION 1
1.1. Calculate the WACC associated with each range of financing/break-point.
To calculate the Weighted Average Cost of Capital (WACC), consider the cost of debt, cost of
equity, and their respective weights in the capital structure. The formula for WACC is:
Where:
E = Equity
D = Debt
V = Total value (Equity + Debt)
Re = Cost of equity
Rd = Cost of debt
Tc = Corporate tax rate
Step 1: Determine the Cost of Debt (Rd)
Debt Issuance: The debenture is issued at a 5% discount, and the coupon rate is 8%.
The coupon payment = 8% of R1 000 = R80.
Net price of the debenture = R1 000 - 5% discount = R950 per debenture.
After flotation cost = R20.
Net issue price per debenture = R950 - R20 = R930.
Cost of debt (Rd) is calculated using the formula:
Rd = Coupor1 Payment _ 80 ~ S.G%
Net Issue P rice 930
This is the pre-tax cost of debt. To get the after-tax cost of debt, multiply by (1−Tc).
Rdancr-t/u: = 8.6% x (1 - o.:30) = 8.6% x 0.70 = 6.02%
t t t
2 SEMESTER
t t t t t
2
lh.L QUESTIONS Fl!ILLvi ANf WERED
1
DUE: 1ef sEfPTEMBER 2d2 s
DISCLAIMER:
THI$ DtjCUMENT IS FDR REFERENCE AND GUI f'NqE PURP SES
ONLY. I DD NDTtTAKE RESPDNSIBILIITY jFDR A~Y PLAGIARl~M. ~MISUS • DR
ACADEMIC MISCONDUCT RESULTING FROM TH131R USE. IT IS YOUR ~
RELEVt T GUlr LINES DR r Tt DAr Di . l l
RESPIJNSIBILl_!i T_! ENSU E ORIGINALITY ANq CDMPLIAN E WITH
, PLEASE USE THIS DOCUMENT AS A GUIDE TO ANSWER YOUR ASSIGNMENT
QUESTION 1
1.1. Calculate the WACC associated with each range of financing/break-point.
To calculate the Weighted Average Cost of Capital (WACC), consider the cost of debt, cost of
equity, and their respective weights in the capital structure. The formula for WACC is:
Where:
E = Equity
D = Debt
V = Total value (Equity + Debt)
Re = Cost of equity
Rd = Cost of debt
Tc = Corporate tax rate
Step 1: Determine the Cost of Debt (Rd)
Debt Issuance: The debenture is issued at a 5% discount, and the coupon rate is 8%.
The coupon payment = 8% of R1 000 = R80.
Net price of the debenture = R1 000 - 5% discount = R950 per debenture.
After flotation cost = R20.
Net issue price per debenture = R950 - R20 = R930.
Cost of debt (Rd) is calculated using the formula:
Rd = Coupor1 Payment _ 80 ~ S.G%
Net Issue P rice 930
This is the pre-tax cost of debt. To get the after-tax cost of debt, multiply by (1−Tc).
Rdancr-t/u: = 8.6% x (1 - o.:30) = 8.6% x 0.70 = 6.02%
