Certainly! Here is the step-step solution for **printed question only** (not the handwritten one): --- # Question 1 Solution **KPL Company has:** - Shares in issue: 1.8 million - Current market price per share: $40 - Debt face value: $11 million - Corporate tax rate: 20% - Risk-free rate: 3.7% - Market risk premium: 8% - Company's credit risk premium: 2.5% - Share price is 95% of face value --- ## (a) Cost of Equity and Cost of Debt ### **Cost of Equity (using CAPM):** \[ \text{Cost of Equity} = \text{Risk-Free Rate} + \beta \times \text{Market Risk Premium} \] \[ K_e = 3.7\% + 1.3 \times 8\% \] \[ K_e = 3.7\% + 10.4\% \] \[ K_e = 14.1\% \] --- ### **Cost of Debt (After Tax):** - Coupon rate = Risk-free rate + Credit risk premium = 3.7% + 2.5% = 6.2% - Market value of debt = 95% of face value = .95 × $11 million = $10.45 million \[ \text{Cost of Debt (pre-tax)} = \frac{Coupon}{Market Value} = \frac{.062 \times \$11M}{\$10.45M} \] \[ = \frac{.682M}{10.45M} = 6.53\% \] \[ \text{Cost of Debt (after-tax)} = 6.53\% \times (1 - .20) = 6.53\% \times .8 = 5.22\% \] --- ## (b) Weighted Average Cost of Capital (WACC) First, calculate the market values: - **Equity:** 1.8 million shares × $40 = $72 million - **Debt:** $10.45 million \[ \text{Total Market Value} = \$72M + \$10.45M = \$82.45M \] \[ \text{Weight of Equity (E/V)} = \frac{72}{82.45} = .8736 \] \[ \text{Weight of Debt (D/V)} = \frac{10.45}{82.45} = .1267 \] \[ \text{WACC} = (E/V) \times K_e + (D/V) \times K_d \times (1-T) \] \[ = .8736 \times 14.1\% + .1267 \times 6.53\% \times .8 \] \[ = 12.31\% + .66\% \] \[ = 12.97\% \] --- ## **Final Answers** **Cost of Equity:** 14.1% **Cost of Debt (after-tax):** 5.22% **WACC:** 12.97%