# Study Session 10: Corporate Finance: Corporate Governance, Capital Budgeting, and Cost of Capital

## Need help solving a problem involving Weighted Average Cost of Capital (WACC)

Hi everyone. I need help with an assignment for class. I’m try to solve the problem while using a ba ii plus calculator and I’m not sure if I’m doing it correctly.

Cost of Debt:

30 year Bonds

Current Price 105.5%

7.6% Coupon Rate

Semi Annual Bond

5 years to Maturity

Tax Rate is 40%

What is the cost of debt?

In the calculator, I put…

N = 10

I/Y = ?

PV = -1055

Pmt = 38

FV = 1,000

## T-bond (Pure exp. theory, Arbitrage-free, Yield, Duration...)

A two-year 4% Treasury Note has 12 months to expiry. The Note pays semiannual
coupons (hence there are two coupon payments left). Assume that you know the following:
Price of the 6-month T-Bill is 98.6527
The 6-month forward rate is F(6m; 12m) = 3:25%
(a) According to the pure-expectations theory of the term structure of interest rates, how
should the 6-month spot rate evolve?
(b) What is the arbitrage-free price of the 4% T-Note?
(c) What is the yield to maturity of the 4% T-Note?

## Calc WACC using dividend discount model

Can someone please explain this particular portion of the problem D/(D + E) = 0.8033/1.8033 = 0.445. given the following

Before-tax cost of new debt
8 percent

Tax rate
40 percent

Target debt-to-equity ratio
0.8033

Stock price
\$30

Next year’s dividend
\$1.50

Estimated growth rate
7 percent

Solution

CALC WACC

## free cash flow calculation

I want to invest in a new company and so I want to calculate the free cash flow and hence the IRR of it

I use the typical formula in which EBIT *(1-T)+depreciation-change in working capital- capex = free cashflow

But in one of the cost item of this company, it is a management fee (assume it is \$100) which is payable to me every year as the new shareholder of this company

and how should this management fee be accounted for? should it add back into the above free cashflow formula?

## Country risk premium in the cost of equity

I understand that you add the CRP to the equity risk premium in CAPM to account for it, but in this particular question on a CFAI topic test they seem to have adjusted Beta and I cant figure out how or why:

https://ibb.co/sjZTZcH

## Solving questions about flotation costs of equity and NPV

Is the only way to calculate NPV by hand, by discounting each individual cash flow one by one, totaling, and subtracting the initial amount of equity that was raised? Click this link to view an answer explanation for a module quiz from Kap; if anyone can explain how to do this on the TI BA II I would appreciate it:

https://ibb.co/qY5fhwH

## Calculate WACC with no debt. But, what about Current Liabilities?

Hey guys.

Say, a company has 0 debt, no bonds, they borrow nothing… so, we will calculate WACC = (E/V) x Re    right?

But, they have current liabilities. So what now? E/V = E / (Equity + current liabilities) ? Or something?

## reading 35 - part practice question 22

Hi, I am having some issues calculating the cost of debt for the below :

Currently outstanding bonds     \$2.4 million five-year bonds, coupon of 12.5 percent, with a market value of \$2.156 million

The solution presented in the curriculum is as follows :

For debt: FV = 2,400,000; PV = 2,156,000; n = 10; PMT = 150,000

Solve for i. i = 0.07748. YTM = 15.5%

However , I am not getting the 0.07748 but a negative rate.

## Discount Rate: Nominal or Effective?

Capital Budgeting

Is the discount rate used to discount cash flows an effective rate or  a nominal rate?

## CFA L1 Question about the questions on the exam!

Hello guys, a friend of mine ,giving the l1 exam on June, asked me about the questions of l1. He asked if a question could be a combination of different study sessions,

For example.If i have to calculate the growth rate on Corp Finance which is  (1-D/EPS)xROE and the ROE is not given but i have the following information   ……Net Income = x     and AVG Equity = y   so ROE = x/y………..But this ratio is given on FRA and not on Corp Finance. So is each section a thing of its own or there can be questions that you have to combine knowledge from many study sessions?

Thank you