Homework Answers
| Since the short-term bank loans is permanent source of finance it should be included in computation of WACC. | ||||||||||
| Market value of bank loan | =270 | 270 | million | |||||||
| Market value of debt | =2150 | 2150 | million | |||||||
| Market value of equity | =10*85 | 850 | million | |||||||
| Post tax cost of bank loan = | =13%*(1-0.35) | 8.45% | ||||||||
| Post tax cost of debt = | =11%*(1-0.35) | 7.15% | ||||||||
| cost of equity = | 18% | |||||||||
| Computation of WACC = | ||||||||||
| i | ii | iii=i*ii | ||||||||
| Source | Market value | Weight | Cost of capital | Weight * cost of capital | ||||||
| Bank loan | 270 | 8.26% | 8.45% | 0.70% | ||||||
| Debt | 2150 | 65.75% | 7.15% | 4.70% | ||||||
| Equity | 850 | 25.99% | 18.00% | 4.68% | ||||||
| 3270 | 10.08% | |||||||||
| WACC = | 10.1% | |||||||||
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