QUESTION 41 CGI Co. has a desired capital structure of 10-40-50 (preferred shares, debt, and ordinary shares, respectiv...
QUESTION 41
- CGI Co. has a desired capital structure of 10-40-50 (preferred shares, debt, and ordinary shares, respectively). The tax rate shifted from 24% to 32%. Other information:
Before-tax cost of preferred stock: 8%
Before-tax cost of common stock: 14%
Before-tax cost debt: 6%
What is the new WACC of CGI Inc.?
|
a. |
9.33% |
|
|
b. |
9.43% |
|
|
c. |
10.2% |
Homework Answers
Information provided:
Weight of equity= 50%
Weight of preference shares= 10%
Weight of debt= 40%
Yield of common shares= 14%
Yield of preference shares= 8%
Yield to maturity= 6%
Tax rate= 32%
The weighted average cost of capital is calculated using the below formula:
WACC=Wd*Kd(1-t)+Wps*Kps+We*Ke
where:
Wd= Percentage of debt in the capital structure.
Kd= The before tax cost of debt
Wps= Percentage of preferred stock in the capital structure
Kps=Cost of preferred stock
We=Percentage of equity in the capital structure
Ke= The cost of common equity.
T= Tax rate
WACC= 0.40*6%*(1 – 0.32) + 0.10*8% + 0.50*14%
= 1.6320% + 0.80% + 7%
= 9.4320%
Hence, the answer is option b.
In case of any query, kindly comment on the solution.
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