Answer to Question #249931 in Financial Math for 626

Question

Use the information provided below to calculate the rate at which the net cash flow of a capital project envisaged by Mike’s Farm must be discounted. Capital structure= 60% own capital and 40% loan capital. Composition of a loan Capital = 30% short term, 40% Medium-term and 30% Long term loan capital. Present interest rates = 20%, 18% and 14% per year on short, medium and long term loans respectively. After tax rate of return on own capital = 12%. Marginal tax rate =19%

Answer 1

$D=0.6*0.12+0.4*(0.3*0.2+0.4*0.18+0.3*0.14)*(1-0.19)=0.1284=12.84\%$