Questions for the Group Assignment – Where Do We Draw the Line?

    1. Why do you think Paul prefers to use the WACC when analysing product

    acquisitions rather than some baseline rate or the rate on the cheapest capital

    component? (1 marks)

    2. How should Ron go about figuring out the cost of debt? Calculate the firm’s

    cost of debt? ( 3 marks)

    3. Why is there a cost associated with a firm’s retained earnings? How can Ron

    estimate the firm’s cost of retained earnings? (3 marks)

4. What are NuChem’s costs of new common stock when the firm raises less

    than $50 million, between $50million and 200 million, and more than $200

    million worth of new equity? (5 marks)

5. What are Nuchem’s weighted average costs of capital (WACC) as a result of

    different costs of equity? You will need to identify each level of new capital

    raised before finding out its corresponding WACC. (8 marks)