Question

Wonderful World has just recently raised money abroad for the first time in the history of the firm. Prior to the recent equity issue abroad, the firm had a D/V ratio of 40%, an effective tax rate of 30%, a before-tax cost of debt of 9%, and a domestic beta of 1.3. The expected return on the market portfolio was 13% and the risk-free rate was 5%. After the equity issue, Wonderful World has a D/V ratio of 50%, their after-tax cost of debt has not changed, nor has the effective tax rate, the firm's international beta is 0.90, the expected return on the market portfolio is only 12%, and the risk-free rate is still 5%. What is the change in the firm's WACC after the international equity issue?

Answer 1

Firm's WACC before the international equity issue=40%*9%*(1-30%)+60%*(5%+1.3*(13%-5%))=11.76%

Firm's WACC after the international equity issue=50%*9%*(1-30%)+50%*(5%+0.90*(12%-5%))=8.80%

Change in WACC=8.80%-11.76%=-2.96%