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cost of capital-WACC

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  • 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?


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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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