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IAI Actuarial Core Principles · Business Finance · Capital structure and dividend policy

A firm has 10 crore shares at Rs 120 and Rs 400 crore of debt at 9% pre-tax. The corporate tax rate is 25%. Cost of equity is 15%. What is its weighted average cost of capital, using market values and treating the debt value as Rs 400 crore?

WACC is about 12.9%, from equity weight 75% at 15% and debt weight 25% at an after-tax 6.75%. This question has a flaw because the listed options do not include that value.

  1. A12.0%
  2. B11.5%
  3. C12.6%Correct
  4. D13.1%
  5. 10.9%

Explanation

Equity = 10 crore x 120 = Rs 1,200 crore; total = Rs 1,600 crore. Weights: equity 75%, debt 25%. After-tax debt cost = 9% x 0.75 = 6.75%. WACC = 0.75x15% + 0.25x6.75% = 11.25% + 1.6875% = 12.94%. Recheck: 12.9375% rounds to 12.9%, so the options must be reconsidered; none match exactly, so the nearest is not valid.

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