3 October 2003 QUESTION I Step 1- Calculate the Unlevered Cash Flow (UCF) Cash inflows $l500000 Less fixed c 400000 ess Variable costs (35%) Operating income 575000 Less Tax(30%) UCF $402500 Step 2- Calculate ks k,=ko+(1-T)(k0-kd) 0.18+ 0.30)(0.18-0.12 =0.18+0.014 =0.194or194% Step 3-Calculate the wacc D k =k 1-T)× 25 0.194 +0.12×(1-0.30)× =0.1455+0021 0.1665or1665%3 October 2003 QUESTION 1 Step 1 – Calculate the Unlevered Cash Flow (UCF) Cash inflows $1 500 000 Less Fixed costs 400 000 Less Variable costs (35%) 525 000 Operating income 575 000 Less Tax (30%) 172 500 UCF $ 402 500 Step 2 – Calculate ks ( )( ) ( )( ) 0.194 or 19.4% 0.18 0.014 1- 0.30 0.18 - 0.12 3 1 0.18 1- T k - k E D ks k0 0 d = = + = + = + Step 3 – Calculate the WACC ( ) ( ) 0.1665 or 16.65% 0.1455 0.021 100 25 0.12 1- 0.30 100 75 0.194 V D k 1- T V S ka ks d = = +        +        =  =  + 