Corporate Finance - Corporate Finance Section 2
- Option : B
- Explanation : WACC = Wd Rd (1 – t) + Wp Rp + We Re = [0.13 * (1 – 0.30) + 0.17 + 0.22] / 3 = 16.03%
| Capitalcomponent | Book Value(000) | Market Value(000) | Component cost |
| Debt x | € 120 | € 100 | 6% |
| Preferred stock | € 60 | € 60 | 9% |
| Common stock | € 300 | € 240 | 13% |
The company’s weighted average cost is closest to:
- Option : A
- Explanation : The company’s weighted average cost WACC is equal to: WACC = Wd Rd (1 – t) + Wp Rp + We Re The target capital structure is: Market value of equity = 240 / 400 = 60% Market value of debt = 100 / 400 = 25% Market value of preferred stock = 60 / 400 = 15%> Rd (1 – t) = 6% (1 – 35%) = 3.90%, Re = 13%, Rp = 9% WACC = 0.25 * 3.9% + 0.15 * 9% + 0.60 * 13% = 10.13%
- Option : B
- Explanation : Wd = (D/E) / (1 + D/E) = 0.6 / (1 + 0.6) = 0.375 We = 1 - Wd = 1 – 0.375 = 0.625 WACC = Wd Rd (1 - t) + We Re = 0.375 * 0.125 * (1 – 0.4) + 0.625 * 0.17 = 13.44%.
| Source | Amount | Cost |
| Common Stock | 100,000,000 | 16.0% |
| Preferred Stock | 2,000,000 | 14.5% |
| Debt | 18,000,000 | 12.0% |
| Total | 120,000,000 |
If the tax rate is 35%, the company’s weighted average cost of capital is closest to:
- Option : B
- Explanation : WACC = Wd Rd (1 – t) + Wp Rp + We Re = [(18/120) * 0.12 * (1 – 0.35)] + [(2/120) * 0.145] + [(100/120) * 0.16] = 14.745%
- Option : B
- Explanation : WACC = Wd Rd (1 – t) + Wp Rp + We Re Re = Risk free rate + β (Market risk premium) Re = 5 + 1.2 (7) = 13.4% Rd = Debt rate (1 - tax rate) Rd = 11 (1 - 0.2) = 8.8% Rp = Dividend / Price = 6 / 48 = 12.5% WACC = 0.134 * 0.45 + 0.088 * 0.35 + 0.125 * 0.20 WACC = 11.6%
