| Course | WMBA 6070 Managerial Finance |
|---|---|
| Week | Week 4 |
| Paper type | Memo |
| Length | About 820 words, 4 pages |
| Format | Memo, APA 7 citations |
| School | Walden University |
| Program | Master of Business Administration (MBA) |
| Updated | October 2026 |
Free sample paper for WMBA 6070 Week 4
Memorandum
To: Owners, Brightwater Crane and Rigging
From: Finance Manager
Date: October 12, 2026
Re: The weighted average cost of capital and which projects it should screen
The Number
Brightwater's weighted average cost of capital is about 10.5 percent. That is the return a project of ordinary risk must earn to satisfy both the firm's lenders and its owners, and it should be the hurdle rate for replacing and adding cranes in the firm's existing business. It should not be used for the proposed wind turbine maintenance venture, which carries more risk than the business it would sit inside. The sections below build the figure and then test where it should and should not be used.
The Firm's Financing
After the planned $8 million private note, Brightwater will carry three kinds of debt and one kind of equity.
Table 1
Sources of Capital, Costs and Weights
| Source | Amount | Pre-tax cost | After-tax cost | Weight | |
|---|---|---|---|---|
| Bank term loan | $10 million | 7.0% | 5.5% | 18.5% | |
| Equipment notes | $6 million | 6.8% | 5.4% | 11.1% | |
| Private senior notes | $8 million | 8.1% | 6.4% | 14.8% | |
| Owners' equity (estimated value) | $30 million | 14.25% | 14.25% | 55.6% | |
| Total | $54 million | Not applicable | 10.5% weighted | 100% | |
After-tax debt costs assume a 21 percent tax rate on the owners' pass-through income; the equity value is an estimate at about six times operating cash flow. The firm is composite.
The debt costs are known: they are the rates on the loans and, for the new notes, the 8.1 percent yield implied by the lead investor's quote in Week 3. Because the owners deduct interest, each loan's true cost is its stated rate reduced by the 21 percent tax saving.
The Cost of Equity
The owners' required return cannot be observed directly, because Brightwater's shares do not trade. The estimate starts from the capital asset pricing model and then adds a premium because the firm is small and privately held.
The risk-free rate is the ten-year Treasury yield, 5.24 percent on October 9, 2026 (U.S. Department of the Treasury, 2026). The equity risk premium is 4.23 percent, Damodaran's implied premium for the U.S. market at the start of 2026. For beta, there is no listed crane rental industry, so the memo uses the unlevered beta of 0.87 for machinery companies in Damodaran's January 2026 data and relevers it for Brightwater's debt-to-equity ratio of 0.8: 0.87 x [1 + (1 minus 0.21) x 0.8] = about 1.42 (Damodaran, 2026). The model's cost of equity is 5.24 + 1.42 x 4.23 = about 11.25 percent.
A further 3 percentage points is added because Brightwater is small and its owners cannot sell their stake easily. That premium is a judgment, and it is the least certain number in the memo. With it, the cost of equity is about 14.25 percent.
The Weighted Average
Weighting each source by its share of total capital gives 0.556 x 14.25 + 0.185 x 5.53 + 0.111 x 5.37 + 0.148 x 6.40 = about 10.5 percent.
Is 10.5 Percent the Right Screen?
Three projects are waiting for a decision, and the answer differs for each.
The first is replacing two aging rough-terrain cranes and adding a 250-ton crane. These projects are the firm's core business, financed in the same way, with the same customers and the same risk. The weighted average cost of capital is built for exactly this kind of project, and 10.5 percent is the right hurdle.
The second is a venture to provide cranes and crews for wind turbine maintenance across Indiana and Ohio. The work depends on a small number of large customers, on specialized equipment that has few other uses and on the pace of turbine construction, which moves with federal and state policy. Its risk is higher than the core business. Using 10.5 percent would make it look better than it is. A rate of about 13 percent, adding roughly 2.5 points for the concentrated customer base and the specialized equipment, is a more honest screen.
The third is paving the equipment yard to cut tire and maintenance costs. Its savings are fairly predictable, but they depend on how many cranes the firm runs, so its risk is similar to the business. It should face the standard 10.5 percent.
In the survey of chief financial officers by Graham and Harvey (2001), a large share of firms used one firm-wide rate for every project, although finance theory ties the rate to each project's own risk. That practice is simple, but it biases a firm toward risky projects and away from safe ones. Separating the wind venture avoids that bias.
What Would Change the Number
The figure would move most with the equity premium for size and illiquidity, which could reasonably range from 2 to 4 points; the cost of capital would then range from about 9.9 to 11.0 percent. It would also rise if interest rates rose further. Finance will refresh the figure annually and after any large change in borrowing.
References
Damodaran, A. (2026). Betas by sector (US) [Data set]. NYU Stern School of Business. https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.html
Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243. https://doi.org/10.1016/S0304-405X(01)00044-7
U.S. Department of the Treasury. (2026). Daily Treasury par yield curve rates [Data set]. https://home.treasury.gov/resource-center/data-chart-center/interest-rates
WMBA 6070 Week 4 instructions, in plain terms
Cost of capital assignments in managerial finance usually ask for a memo that works through the cost of each financing source the scenario firm actually carries, weights them by its capital structure and argues whether the result is the right screen for the projects waiting. Instructors expect sourced market inputs, a defensible beta for a firm without traded shares and explicit treatment of judgment-based premiums. They also expect the memo to say where a single company-wide rate would mislead. Showing how much the result moves when the least certain input changes helps the owners understand how precise the figure really is and when it should be updated.
How the WMBA 6070 Week 4 example is put together
The memo states the number and its limits in the first paragraph. A table lists four sources of capital with amounts, pre-tax and after-tax costs and weights. A section explains debt costs, including the Week 3 note yield. A cost of equity section uses the ten-year Treasury yield, Damodaran's implied premium and an unlevered machinery beta relevered for the firm's debt, then adds a stated premium for size and illiquidity. The weighted average is computed in one line. A section applies the rate to three waiting projects, raising it for the wind venture, and cites Graham and Harvey on firms that use a single rate. A closing section gives the range of results when the judgment premium moves between 2 and 4 points. Margin comments flag the equity build, the project test and the range.
Where the marks sit in the WMBA 6070 Week 4 rubric
Graders reward a weighted average built from the firm's real sources of capital, with costs and weights that can be traced. A cost of equity supported by current market data and an explained beta earns credit; naming the judgment-based premium as the least certain input shows honesty. The heaviest marks usually go to deciding which projects the figure should screen, since a firm-wide rate fits only projects as risky as the firm itself. Citing evidence on how firms actually set hurdle rates adds depth. A sensitivity range tells the reader how much to trust the number. Instructors also check that after-tax debt costs are used correctly. A clean table and accurate references to data sources settle the final points.
WMBA 6070 Week 4 help from the desk
List every source of financing the firm actually uses, with its amount and cost. Convert debt costs to after-tax rates. For equity, use a current risk-free rate, a sourced equity premium and a beta from comparable firms adjusted for your firm's debt. Add any premium for size or illiquidity and say plainly that it is a judgment. Weight the costs by market or estimated values. Then look at the projects waiting and ask whether each has the same risk as the firm. Students commonly lose marks by using book values without comment, by forgetting the tax deduction on interest or by applying one rate to every project. Show a range for your least certain input. If you need a custom sample hurdle rate memo for your organization, send us its financing.
Get a WMBA 6070 Week 4 example written to your instructions
The Week 4 prompt and its rubric are enough to start, though the case exhibit showing debt, preferred and equity balances makes the sample sharper. A finished hurdle rate memo comes back in 24 to 48 hours, free the first time. Tell the desk whether the divisional adjustment is required, since that changes the closing section.
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WMBA 6070 Week 4 questions, answered
Where can I find a free WMBA 6070 Week 4 sample paper?
The complete hurdle rate memo for a crane company is published on this page.
What is the cost of capital?
About 10.5 percent, weighted across bank debt, equipment notes, private notes and equity.
How is the cost of equity estimated?
With the capital asset pricing model, a relevered machinery beta of about 1.42 and a 3-point size premium, giving about 14.25 percent.
Which project gets a higher rate?
The wind turbine maintenance venture, at about 13 percent.
How sensitive is the result?
It ranges from about 9.9 to 11.0 percent as the size premium moves from 2 to 4 points.