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

## WACC of a specific project

Hi everybody,

I am a bit confused with one concept and would like to confirm something with you:

I always thought that when we were computing the WACC of a project that a company wanted to do, we were using the WACC of the whole firm based on the capital structure of the firm and not the capital structure used to finance the specific project.

## Wrong Statement in R32 - Capital Budgeting?

On Page 61:

https://gyazo.com/6223310c64677a7a91a62ef9546ea921

“Project B has the higher NPV below the crossover point, and Project A has the higher NPV above it.”

Should be the opposite right? Like:

“Project B has the higher NPV above the crossover point, and Project A has the higher NPV below it”

Anyone agree?

## Average Accounting Rate of Return

How is the average book value of the formula calculated (the books gives a example but doesn`t really explain it well), the 200K comes from the investment in the project, but what about the rest?) it just says the average book value is 200K-0/2 = 100K, why divided by 2?

It`s on Page 57 of the 4th book.

## IRR

Hey everyone,

Hope this finds you well.

I have a query regarding IRR and its substance.

We can use IRR to estimate the profitability of the potential investment. I.e we have $100 and a project with the following cash flows.

year 0 - (100), year 1 - 20, year 2 - 30, year 3 - 30, year 4 - 40.

## 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?

thank you for any advice

## 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:

## 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:

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