Part 1 – 10 MARKS You are the Financial Analyst of Fred & Co which has the following Equity information ( 50 million sha

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Part 1 – 10 MARKS
You are the Financial Analyst of Fred & Co
which has the following Equity information ( 50 million
shares, $80 per share, Beta = 1.15, Market risk premium = 9%,
Risk-free rate = 5%). In addition the treasurer just provided
you with the following debt information ($1 billion in outstanding
debt (face value), Current quote = 110, at a cost of 7.85%. Fred
& Co have a corporate Tax rate of 40%.
Required
You are required to calculate the following
a. What is the cost of
equity? – 3 Marks
b. What is the after-tax cost of
debt? – 1 Marks
c. What are the capital structure
weights? – 4 Marks
d. What is the WACC? – 2
Marks
Part 2 – 5 MARKS
Consider the following statement by a financial manager: "Since
we are financing our new manufacturing facility 100% with equity,
we must evaluate it using a higher rate of return than we would if
we financed a portion of the facility with debt." Do you agree? Why
or why not? Be sure to fully explain the rationale behind your
argument