Homework Answers
WACC = (E x Ke) + ((Kd x (1-T) x D) + (P x Kp)
E + D + P
Where:
E = market value / Book Value of the firm’s equity (common stock
+ retained earning)
D = market value/ / Book Value of the firm’s debt
P = market value / Book Value of the firm’s Preference Stock
Kp = cost of Preference Stock
Ke = cost of equity (required rate of return)
Kd = cost of debt (yield to maturity on existing debt)
T = tax rate
But
Kp = D/P0
Where:
P0 = market value of preference stock
D = Preference dividend
So Kp = 12/92 =13.04 %
but in case of WACC on book value value P0 shall be Book value & so Kp shall be 12/100 =12 %
&
Kd = I x (1-T)
Where:
T = tax rate
I = Interest Received on debt
So Kd (Long term debt) = 8 x (1-0.3) =5.60 %
but in case of WACC on market value interest on debt shall be replaced by YTM so Kd shall be 12 x (1-0.3) =8.4 %
For Ke
Ke = (D1 / P0 ) + g
Where:
P0 = market /book value of common Equity (Retained
Earning & common stock)
D1 = Dividend of next year i.e Dividend of current year
x (1+ g)
g = Growth rate of dividend
So Ke (Book value) = 2400000 x (1+0.08) / 14000000 + 0.08 = 15.20 %
36000000/14000000
Ke (Market value) = 2400000 x (1+0.08) / 14000000 + 0.08 = 8.93 %
20
So WACC (book value) = (E x Ke) + ((Kd x (1-T) x D) + (P x Kp)
E + D + P
= (36,000,000 x 15.20%) + [(5.60 % x (1-0.3)) x 120,000,000] + (12% x 12,000,000) = 6.914 %
36,000,000 +120,000,000 +12,000,000
& WACC (market value) = (E x Ke) + ((Kd x (1-T) x D) + (P x Kp)
E + D + P
= ((14,000,000 x 20) x 8.93%) + [(8.40 % x (1-0.3)) x (1,200,000 x 82)] + (13.04% x (120,000 x 92)) = 8.276%
(14,000,000 x 20) + (1,200,000 x 82) +(120,000 x 92)
Add Answer to:
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