Computation of Market Debt to Value Ratio:

Market Debt to Value Ratio = Market Value of Debt / Market Value of Firm

Here,

Computation of Market Value of Debt using PV Function in Excel:

=-pv(rate,nper,pmt,fv)

Here,

PV = Market Value of Debt = ?

Rate = 9%

Nper = 10 years 

PMT = $10,000,000*8% = $800,000

FV = $10,000,000

Substituting the values in formula:

=-pv(9%,10,800000,10000000)

PV or Market Value of Debt = $9,358,234.23

 

Market Value of Firm = Market Value of Common Stock + Market Value of Preferred Stock + Market Value of Debt 

= (1,000,000*$20) + (($2,000,000/$20)*$15) + $9,358,234.23

= $20,000,000 + $1,500,000 + $9,358,234.23

Market Value of Firm = $30,858,234.23

 

Market Debt to Value Ratio = $9,358,234.23/$30,858,234.23 = 30.33%

 

Computation of University's WACC:

WACC = Cost of Common Stock*Weight of Common Stock + Cost of Preferred Stock * Weight of Preferred Stock + Cost of Debt*(1-Tax Rate)*Weight of Debt

Here,

Cost of Common Stock = Risk-free Rate + Beta*Market Risk Premium 

= 6% + 0.8*10%

= 6% + 0.08

Cost of Common Stock = 14%

 

Cost of Preferred Stock = Annual Dividend/Current Market Price 

= $2/$15

Cost of Preferred Stock = 13.33%

 

Cost of Debt = Yield to Maturity = 9%

 

Weight of Common Stock = $20,000,000/$30,858,234.23 = 64.81%

Weight of Preferred Stock = $1,500,000/$30,858,234.23 = 4.86%

Weight of Debt = $9,358,234.23/$30,858,234.23 = 30.33%

 

WACC = 14%*64.81% + 13.33%*4.86% + 9%*(1-40%)*30.33% = 11.36%