EXCELCENTRE LEARNING INSTITUTE 061 043 9805
PU E
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NG Y L E NC
OU TO THE GATE OF EXC EL
Education is the most powerful weapon which you can use to change the world
,EXCELCENTRE LEARNING INSTITUTE 061 043 9805
WARNING: PLEASE NOTE THAT PLAGIARISM IS A SERIOUS ACADEMIC
OFFENSE, therefore students must use this document ONLY as a guideline. Hence
students have regenerated their own (personalized) solutions paying particular
attention to module contents as prescribed by module facilitators, lecturers and
supervisors. This document’s purpose is to compact all sources of information that
might be relevant to students’ assignments, hence additional knowledge on the
provided information is not restricted by the authors. However, submitting this
document as one’s final work is considered unethical, and students should be
penalized. If this document is plagiarized by the users and fails, EXCELCENTRE
should not be rendered accountable since the contents in this document only give
learners a kick-start on what is expected of them from their areas of specialty.
CAUTION: STUDENTS ARE NOT MANDATED TO USE EVERY DETAIL IN THIS
DOCUMENT IN WRITING THEIR ASSIGNMENT
Education is the most powerful weapon which you can use to change the world
,EXCELCENTRE LEARNING INSTITUTE 061 043 9805
Table of Contents
Question 1: Culio Jay Ltd Weighted Average Cost of Capital ..................................... 4
(a) Calculate the WACC using Book Values [3 Marks] ............................................... 5
(b) Calculate the WACC using Market Values [3 Marks] ............................................ 5
(c) Calculate the Target WACC [4 Marks] ................................................................... 7
(d) Which WACC should be used to evaluate new projects? [2 Marks] ...................... 8
e) Explain how new investments should be financed using the selected WACC [10
Marks] ........................................................................................................................ 8
Question 2: Manda Bus Service Pty Ltd [45 Marks] ................................................. 11
(a) Determine the after-tax WACC of Manda Pty Ltd [33 Marks] .............................. 12
(b) Discuss the assumptions underlying the use of WACC as a discount rate within
Manda Pty Ltd [12 Marks] ........................................................................................ 20
Question 3: Chance Pty Ltd [35 Marks] .................................................................... 24
(a) Calculate the Payback Period for each project [7 Marks] .................................... 24
(b) Calculate the Accounting Rate of Return (ARR) [9 Marks] .................................. 27
(d) Advantages and disadvantages of the NPV appraisal method [6 Marks] ............ 33
References ............................................................................................................... 38
Education is the most powerful weapon which you can use to change the world
, EXCELCENTRE LEARNING INSTITUTE 061 043 9805
Question 1: Culio Jay Ltd Weighted Average Cost of Capital
The weighted average cost of capital (WACC) is the average rate of return that a
company is expected to earn on its investments to meet the required returns of both
equity and debt providers. In capital budgeting, WACC is typically applied as a
discount or hurdle rate when evaluating projects that have a level of risk similar to the
company’s existing operations. For investment decisions, market values and the
marginal cost of financing are generally more appropriate than historical book values
because they better reflect current market conditions and financing costs (Brealey,
Myers, Allen & Edmans, 2023). The following calculations determine Culio Jay Ltd’s
book-value WACC, market-value WACC and target WACC.
Given information
Item Amount
Ordinary share capital $500,000
Retained income $500,000
Long-term debt $1,000,000
Capital employed $2,000,000
Required return on equity 20%
Existing interest rate on debt 10%
Current market interest rate on similar debt 14%
Annual dividend $400,000
Ordinary shares 100,000
Debt repayment period 4 years
Target debt ratio 40%
For WACC purposes, total equity is:
𝐸 = $500,000 + $500,000 = $1,000,000
Therefore:
𝐸 + 𝐷 = $1,000,000 + $1,000,000 = $2,000,000
The general WACC formula is:
Education is the most powerful weapon which you can use to change the world
PU E
SHI
NG Y L E NC
OU TO THE GATE OF EXC EL
Education is the most powerful weapon which you can use to change the world
,EXCELCENTRE LEARNING INSTITUTE 061 043 9805
WARNING: PLEASE NOTE THAT PLAGIARISM IS A SERIOUS ACADEMIC
OFFENSE, therefore students must use this document ONLY as a guideline. Hence
students have regenerated their own (personalized) solutions paying particular
attention to module contents as prescribed by module facilitators, lecturers and
supervisors. This document’s purpose is to compact all sources of information that
might be relevant to students’ assignments, hence additional knowledge on the
provided information is not restricted by the authors. However, submitting this
document as one’s final work is considered unethical, and students should be
penalized. If this document is plagiarized by the users and fails, EXCELCENTRE
should not be rendered accountable since the contents in this document only give
learners a kick-start on what is expected of them from their areas of specialty.
CAUTION: STUDENTS ARE NOT MANDATED TO USE EVERY DETAIL IN THIS
DOCUMENT IN WRITING THEIR ASSIGNMENT
Education is the most powerful weapon which you can use to change the world
,EXCELCENTRE LEARNING INSTITUTE 061 043 9805
Table of Contents
Question 1: Culio Jay Ltd Weighted Average Cost of Capital ..................................... 4
(a) Calculate the WACC using Book Values [3 Marks] ............................................... 5
(b) Calculate the WACC using Market Values [3 Marks] ............................................ 5
(c) Calculate the Target WACC [4 Marks] ................................................................... 7
(d) Which WACC should be used to evaluate new projects? [2 Marks] ...................... 8
e) Explain how new investments should be financed using the selected WACC [10
Marks] ........................................................................................................................ 8
Question 2: Manda Bus Service Pty Ltd [45 Marks] ................................................. 11
(a) Determine the after-tax WACC of Manda Pty Ltd [33 Marks] .............................. 12
(b) Discuss the assumptions underlying the use of WACC as a discount rate within
Manda Pty Ltd [12 Marks] ........................................................................................ 20
Question 3: Chance Pty Ltd [35 Marks] .................................................................... 24
(a) Calculate the Payback Period for each project [7 Marks] .................................... 24
(b) Calculate the Accounting Rate of Return (ARR) [9 Marks] .................................. 27
(d) Advantages and disadvantages of the NPV appraisal method [6 Marks] ............ 33
References ............................................................................................................... 38
Education is the most powerful weapon which you can use to change the world
, EXCELCENTRE LEARNING INSTITUTE 061 043 9805
Question 1: Culio Jay Ltd Weighted Average Cost of Capital
The weighted average cost of capital (WACC) is the average rate of return that a
company is expected to earn on its investments to meet the required returns of both
equity and debt providers. In capital budgeting, WACC is typically applied as a
discount or hurdle rate when evaluating projects that have a level of risk similar to the
company’s existing operations. For investment decisions, market values and the
marginal cost of financing are generally more appropriate than historical book values
because they better reflect current market conditions and financing costs (Brealey,
Myers, Allen & Edmans, 2023). The following calculations determine Culio Jay Ltd’s
book-value WACC, market-value WACC and target WACC.
Given information
Item Amount
Ordinary share capital $500,000
Retained income $500,000
Long-term debt $1,000,000
Capital employed $2,000,000
Required return on equity 20%
Existing interest rate on debt 10%
Current market interest rate on similar debt 14%
Annual dividend $400,000
Ordinary shares 100,000
Debt repayment period 4 years
Target debt ratio 40%
For WACC purposes, total equity is:
𝐸 = $500,000 + $500,000 = $1,000,000
Therefore:
𝐸 + 𝐷 = $1,000,000 + $1,000,000 = $2,000,000
The general WACC formula is:
Education is the most powerful weapon which you can use to change the world
