# CMA Study Group

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## cost of capital-WACC #### Syed Yousuf Jamal20 days ago #### Sunil Divakaran19 days ago #### Sunil Divakaran18 days agoBest Answer #### Shumin Han19 days ago #### Joseph Tarantino19 days ago #### Shumin Han19 days ago #### Michaela Mae Portarcos18 days ago #### Manuel Antonio Alvarez Leal19 days ago #### Seema Chaudhary18 days ago #### Manuel Antonio Alvarez Leal17 days ago #### Rodel Evangelista17 days ago • #### 1.  cost of capital-WACC

Posted 20 days ago
Gangland Water Guns Inc. has a debt-to-equity ratio of 0.5. If the firm's after-tax cost of debt is 7% and its cost of equity is 13%, what is the appropriate WACC?
 6% 10% 11% 16.5%

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Syed Yousuf Jamal

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• #### 2.  RE: cost of capital-WACC

Posted 19 days ago

10%

WACC=weight x after tax cost of capital of each capital component

here debt to equity ratio is 50%. So both debt and equity are 50% each.

applying this to the formula:

WACC for debt= .50x.07= 0.035
WACC for equity= .50x.13= 0.065

Total WACC= 0.035+0.065= 0.10 or 10%#

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Sunil Divakaran
Accountant
DUBAI
United Arab Emirates
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• #### 3.  RE: cost of capital-WACC Best Answer

Posted 18 days ago

I think the correct answer is 11%. The question states Debt to Equity ratio as 0.5. That is D divided by E=0.5 which obviously means E has a greater value than D. Let's put 1 for D and 2 for E. So 1 divided by 2 = 0.5

Total capital = debt+equity, which is 3 as per our assumption

now allocate the weight to each capital component

debt=1/3= 33.33%

equity 2/3 = 66.67%

Wacc for debt = 33.33%x 7%= 2.33%

wacc for equity = 66.67% x 13%= 8.67%

total wacc= 2.33%+8.67%= 11%

I think this make sense. Debt to equity ratio of 0.5 doesn't mean both are equally distributed. The ratio should be 1 in order for both of them to have equal representation in the capital structure.

sorry for the wrong answer and explanation initially.

thank you.

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Sunil Divakaran
Accountant
DUBAI
United Arab Emirates
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• #### 4.  RE: cost of capital-WACC

Posted 19 days ago
The WACC is 10%

Sent from my iPhone

• #### 5.  RE: cost of capital-WACC

Posted 19 days ago
I believe it's 16.5 as follows:

debt to equity = 0.5
0.5 = 0.5 debt / 1.0 equity
0.5 X .07 (after tax cost of debt) = .035 = 3.5%
1.0 X .13 (cost of equity) = .13 =             13.5%
16.5%

• #### 6.  RE: cost of capital-WACC

Posted 19 days ago
It should be 11%, here is the rational:
debt/equity = 0.5
means the capital structure of 1/3 debt & 2/3 Equity thus total capital of 1.
1/3 of 7% is 2.333%
2/3 of 13% is 8.666%
total WACC is 11%

I overlooked the condition at first time by mistaken “debt to equity “ to “ debt to capital “. sorry for the confusion.

Thanks
Sylvia

Sent from my iPhone

• #### 7.  RE: cost of capital-WACC

Posted 18 days ago
It’s 11%

Since debt to equity ratio is .5, it means that 1/3 of your total assets is financed by debt and 2/3 by equity.

Following that, multiply your after tax cost of debt to the fraction of debt and the cost of equity to the fraction of equity:

Debt: 1/3 x 7% = 2.33%
Equity: 2/3 c 13% = 8.67%

If you add both percentages, you will get 11%

Happy studying!!

Sent from my iPhone

• #### 8.  RE: cost of capital-WACC

Posted 19 days ago
10% since the debt-to-equity ratio is 50%

God bless!
Manny.

• #### 9.  RE: cost of capital-WACC

Posted 18 days ago
WACC= Cost of debt x Weight of debt + cost of equity x weight of Equity
=7% x 50% + 13% x 50%
= 10%

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Seema Chaudhary
Accountant
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• #### 10.  RE: cost of capital-WACC

Posted 17 days ago
Hi, you'll!

I need to get the material for both exams, can anybody send them to me please by email?

Thanks a lot!

God bless!
Manny

• #### 11.  RE: cost of capital-WACC

Posted 17 days ago
Debt to Equity Ratio = 0.50

Ratio                 Rates               WACC
debt              0.50        0.50/1.50      x      7%                   2.33%
equity           1.00        1.00/1.50      x      13%                 8.67%

WACC = 2.33% + 8.67% = 11%

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Rodel Evangelista
Accountant
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• #### 12.  RE: cost of capital-WACC

Posted 17 days ago
11% is correct.
WACC = [Debt/(Debt+Equity)]*C o Debt + [Equity/(Debt+Equity)]*C o Equity
in which, Debt/Equity=0.5 => Debt = 0.5 Equity
Result = 2.33% + 8.67% = 11%

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NGUYEN BUI DUC
Executive Officer
HO CHI MINH CITY
Viet Nam
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