Deliverable Length: 750 – 1,000 words. Use Word.
In this exercise you need to describe capital structure of Apex, calculate the weighted average cost of capital (WACC) and define marginal cost of capital. You must indicate how these costs of capital might be used to determine the feasibility of the capital project.
Please show your work and the equations that you use to calculate the WACC. --
Given:
Weights of 40% debt and 60% common equity (no preferred equity)
A 35% tax rate
Cost of debt is 8%
Beta of the company is 1.5
Risk-free rate is 2%
Return on the market is 11%
Organize your work under the following headings:
- Describe capital structure --
- Determine the WACC given the above assumptions. --
- Indicate how these, WACC and Capital Structure, might be useful to determine the feasibility of the capital project.
- Define marginal cost of capital. --
- Recommend which is more appropriate to apply to project evaluation, the capital structure or the WACC.