IAI Actuarial Core Principles · Business Finance · Cost of capital and evaluating investment projects
A firm's capital structure at market values is equity Rs 300 crore and debt Rs 100 crore. Cost of equity is 14%, pre-tax cost of debt is 8%, tax rate is 30%. What is the WACC?
Calculation gives 11.9%.
- A11.6%
- B12.1%Correct
- C12.5%
- D13.0%
- 10.9%
Explanation
Weights are 75% equity and 25% debt. After-tax debt cost = 8% x 0.7 = 5.6%. WACC = 0.75 x 14% + 0.25 x 5.6% = 10.5% + 1.4% = 11.9%. This does not match any listed figure exactly, so the closest check is required.
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