FIN621 GDB Solution

ABC Limited
a) Inventory Method:Specific Identification Method
b) Specific reason for choosing this method: We can identify Items which are only 20 and vary in their description and price.

XYZ (Private) Limited
c) Inventory Method:FIFO
d) Specific reason for choosing this method:During Inflation the FIFO will show high profits to the investors.

FIN622 GDB Solution

Semester “Spring 2011”
“Corporate Finance (Fin622)” This is to inform you that Graded Discussion Board (GDB#02) has been opened according to the following schedule
Schedule
Opening Date and Time	May 27, 2011 AT 12:00 AM (Mid night)
Closing Date and Time	May 31, 2011 AT 11:59 PM (Mid night)
Note: No extra or bonus/grace period is available for attempting GBD.
The GDB will remain open for "120" hours GDB Question Following data has been calculated for MKJ Company: Cost of Debt = 9% Cost of Equity = 11% Tax Rate = 35% The company is evaluating weighted average cost of capital (WACC) by considering different capital structures. You are required to calculate: WACC if the debt-equity ratio of company is 0.5 WACC if the debt-equity ratio of company is 1.0 WACC if the debt-equity ratio of company is 2.0 What is the trend (increasing/decreasing/constant) of WACC with an increasing debt-equity ratio? IMPORATANT NOTE: You are required to provide answers in percentage terms rounded to two decimal places e.g. 0.00%. Only accurate answers will be graded whereas rounded figures will not be awarded any marks. Furthermore, you are not required to show working and provide only answers in the following manner: WACC (when debt-equity ratio is 0.5)         =   ? WACC (when debt-equity ratio is 1.0)         =   ? WACC (when debt-equity ratio is 2.0)         =   ? Trend of WACC with increasing D/E ratio  =   ?
Important Instructions: The GDB will open and close at above specified date and time. Please note that no grace day and extra time will be given for posting comments on GDB. Use the font style “Times New Roman” and font size “12”. Your answer should be in the format prescribed above. Your answer should include only resulting figures and it should not include working. Do not copy or exchange your answer with other students.  Two identical / copied comments will be markedZero (0) and may damage your grade in the course. Books, websites and other reading material may be consulted before posting your comments but copying or reproducing the text from books, websites and other reading materials is strictly prohibited. Such comments will be marked as Zero (0). You should post your answer on the Graded Discussion Board (GDB), not on the Moderated Discussion Board (MDB). Both will run parallel to each other during the time specified above.  Therefore, due care will be needed. Obnoxious or ignoble answer should be strictly avoided. You cannot participate in the discussion after the due date. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of the GDB is over. For planning your semester activities in an organized manner, you are advised to view schedule of upcoming Assignments, Quizzes and GDBs in the overview tab of the course website on VU-LMS.

SOLUTION:

WACC if the Debt-equity Ratio of Company is .5
WACC=.11(1/1.5) + .09(.5/1.5)(1-.35)
WACC=.11(.666666666) + .09(.333333333)(.65)
WACC=.073333333 + .03(.65)
WACC=.073333333 + .0195
WACC=.092833333
WACC=9.28%
WACC if the Debt-equity Ratio of Company is 1.0
WACC=.11(1/2) + .09(1/2)(1-.35)
WACC=.11(.5) + .09(.5) (.65)
WACC=.055 + ..045(.65)
WACC=.055+.02925
WACC=.08425
WACC=8.42%
WACC if the Debt-Equity Ratio of Company is 2.0
WACC=.11(1/3) + .09(2/3)(1-.35)
WACC=.11(.333333333) + .09(.666666666)(.65)
WACC=.036666666 + .06(.65)
WACC=.036666666 + .039
WACC=.075666666
WACC=7.56%
Trend of WACC With increasing D/E Ratio
Increase in Debt or Debt-equity Ratio decreases the WACC