WACC problem paper

Assignment 2: Quantitative Exercises and Final Project 3: Government Securities

Part One: Quantitative Exercises

Barbow Enterprises, Inc., is considering an expansion in their operations. One of the first items they want to examine is their cost of capital. According to the accounting department, the following items and their respective costs have been identified:

• The cost of Common Equity: 15%
• The before tax cost of debt: 12%
• No Preferred stock

They have also calculated the marginal tax rate to be 40% and the stock sells at its book value.

Barbow Enterprises Inc.

Balance Sheet

Assets

Liabilities and Owners' Equity

Cash

$240

Long Term Debt

$2,304

Accounts Receivable

480

Equity

3,456

Inventories

720

Net P&E

4,320

Total Assets

$5,760

Total Liabilities and owners' Equity

$5,760

Required:

Calculate Barbow’s after-tax weighted average cost of capital, using the data in the balance sheet above.

Deliverable:

By Tuesday, May 7, 2013, submit the completed assignment to the W4: Assignment 2 Dropbox. Use a Microsoft Excel spreadsheet that illustrates your calculations. You may use the formulas embedded in MicrosoftExcel and/or a financial calculator for these calculations.