Question

Chapter 16 2. Calculate the WACC of a firm with EBIT = $50 million, Tax rate = 40%, Debt = $100 million, cost of debt = 9%, and unlevered cost of capital = 12%?

Answer 1

Value of All equity firm =EBIT*(1-Tax rate)/Cost of Unlevered Equity =50*(1-40%)/12% =250
Value of Levered Firm =Value Unlevered +Debt*Tax rate =250+100*40% =290
Value of equity =290-100 =190
Value of Debt =100
Cost of Levered =Cost of Unlevered Equity+(1-Tax Rate)*(Cost of Unlevered Equity -Cost of Debt) *Debt/Equity
Cost of Levered =12%+(1-40%)*(12%-9%)*100/190 =12.9474%
WACC =Weight of equity*Cost of equity+Weight of Debt*Cost of Debt*(1-Tax Rate)
=190/290*12.9474%+100/290*9%*(1-40%) =10.34%