Deliverable Length: 750 – 1,000 words 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 rateCost of debt is 8%Beta of the company is 1.5Risk-free rate is 2%Return on the market is 11%
Organize your work under the following headings: 1. Describe capital structure.2. Determine the WACC given the above assumptions. 3. Indicate how these, WACC and Capital Structure, might be useful to determine the feasibility of the capital project.4. Define marginal cost of capital.5. Recommend which is more appropriate to apply to project evaluation, the capital structure or the Wacc
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To calculate the WACC you first need to determine the cost of equity using the capital asset pricing model: N.B. Use this equation. Re = (Rf) + [B(Rm – Rf)] Re = Cost of equityRf = Risk free rateB =BetaRm = Return on the Market Once you calculate Re then you can calculate the WACC. WACC = [(weight of equity) x (cost of equity)] + [(Cost of Debt) x (Weight of Debt) x (1-tax rate)]