A finished FIN-450 Topic 2 sourced WACC computation example, tracing each input to a dated source, costing debt at yield and comparing market with book weights on one project. Searches like "fin 450 topic 2 assignment example", "fin450 topic 2 sample" and "fin-450 topic 2 example" land here.
What a finished FIN-450 Topic 2 sourced wacc computation looks like
Every figure in the finished computation is illustrative and dated. Equity is 50 million shares at 24, a market value of 1,200 million, against book equity of 700. The firm's semiannual 5 percent bonds, 500 at face with five and a half years to run, trade at 92, so debt is worth 460 and yields about 6.8 percent. The cost of equity uses a 4.2 percent ten-year Treasury yield, a beta of 1.15 from the case's data provider and a 5.5 percent market premium supported by the course text, giving about 10.5 percent. After tax at the 25 percent marginal rate, debt costs 5.1 percent. Market weights of about 72 and 28 percent give a WACC near 9.0 percent. Book weights give about 8.3 percent, and a project returning 8.5 percent passes one test and fails the other.
How a FIN-450 Topic 2 example is structured
An inputs table opens the computation, one row per component with its value, source and observation date. A cost of equity section applies the capital asset pricing model and explains each choice: why a ten-year yield rather than a bill rate, and why the premium comes from the course text rather than a single year's return. The cost of debt section computes yield to maturity from the bond's price and explains why the 5 percent coupon is not today's borrowing cost. A tax paragraph uses the marginal rate and says why an effective rate would misstate the shield. The weights section values equity and debt at market and then at book, setting the two side by side. Both results are then applied to a proposed project returning 8.5 percent. The example closes on the inputs that would move the rate most and how often each is refreshed.
An inputs table with sources and dates
Share price, bond price, Treasury yield, beta, market premium and tax rate each appear with where the figure came from and the date it was observed.
Yield to maturity, not coupon
Bonds priced at 92 with a 5 percent coupon yield about 6.8 percent, and that yield, not the coupon, is what new borrowing would cost.
Marginal rate for the tax shield
Interest saves tax at the rate on the next dollar of income, so the 25 percent marginal rate applies rather than an effective rate distorted by credits.
Market weights set beside book weights
Equity is 72 percent of market value but only 58 percent of book capital, which moves the WACC from about 9.0 to about 8.3 percent.
One project, two verdicts
A project expected to return 8.5 percent clears the book-weighted rate and fails the market-weighted one, so the weighting choice decides the investment.
Where marks go in FIN-450 Topic 2
Book weights used without a word of justification are marked wrong outright on this topic, since owners and lenders require returns on what their claims are worth today, not on historical balances. Taking the coupon as the cost of debt is the second common error, and here it would understate debt's cost by 1.8 points before tax. Papers that quote a beta or a market premium with no source leave the reader unable to check the largest input. Applying an effective tax rate to interest misstates what the deduction is worth at the margin. Carrying the result to three decimals claims a precision no premium estimate supports. A WACC computed and never applied to a decision leaves the work as arithmetic, which is why the 8.5 percent project is in the example.
Get a FIN-450 Topic 2 example written to your instructions
Send the FIN-450 Topic 2 instructions and your classroom rubric, with the firm and market data your section supplies. We write a custom example to them, with every input sourced and dated, debt costed at yield rather than coupon, market and book weights compared and the result tested on a real decision, in 24 to 48 hours. The first one is free.
FIN-450 Topic 2 questions, answered
When are book weights acceptable?
When market values are unavailable or would barely differ, and the paper says so. Privately held firms have no share price, and debt that trades near par has a market value close to its book value. The example uses book weights only as a comparison, because this firm's shares trade well above book equity and its bonds sit below par. Stating the reason for the weighting choice is what separates a judgment from a shortcut.
Why use yield to maturity instead of the coupon rate?
Because the coupon reflects market conditions when the bond was issued, while yield to maturity reflects what lenders require now. A 5 percent coupon bond trading at 92 shows that investors want about 6.8 percent to hold the firm's debt today. A new issue would have to offer something close to that, so the yield, adjusted for tax, is the cost the firm actually faces.
Is this the cost of capital for a real company?
No. The share price, bond terms, Treasury yield, beta and premium are illustrative figures dated to a case, not current market data. A real computation needs prices observed on a stated date, a beta estimate whose method is known and a defended market premium, and it goes stale as markets move. The example shows how FIN-450 expects each component sourced and combined, as coursework rather than investment advice.